賽默飛世爾科技 (TMO) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific third-quarter 2009 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.

Good morning and thank you for joining us.

On the call today with me is Marc Casper, our President and Chief Executive Officer, and Pete Wilver, Senior VIce President and Chief Financial Officer.

Please be aware that this call is being webcast live and will be archived on our website, thermofisher.com, until November 20, 2009.

To reach the replay of the call on our website click on investors then webcast and presentations.

Please also be aware that a copy of the press release of our third-quarter 2009 earnings and future exhibitions is available in the investor section of our website under the heading "Financial Results."

Let me start by briefly covering the Safe Harbor statement.

Various remarks that we may make about the Company's future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Company's Form 10-Q for the quarter ended June 27, 2009 under the caption "Risk Factors," which is on file with the Securities and Exchange Commission and available in the investor 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 the call today we will be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principals, or GAAP.

A reconciliation of these non-GAAP financial pleasures to the most directly comparable GAAP measures is available in the press release of our third-quarter 2009 earnings and future expectations, and also in the investor section of our website, thermofisher.com, under the heading "Financial Results."

So with that I'd like to now turn the call over to Marc.

Thanks, Ken, and good morning, everyone.

Thanks for joining our third-quarter earnings call.

I'm Marc Casper, President and CEO of Thermo Fisher, as of October 15th.

I just want to take a minute to say that I'm honored to step into this role, excited about the opportunities we have, as the world leader in serving science, and ready to lead our Company to achieve our goals for long-term growth, with the support, of course, of our 35,000 employees around the world.

I'd also like to think Marijn Dekkers for all that he's done for Thermo Fisher and for me personally.

We've worked together closely over the past eight years developing and executing the Company strategy and I appreciate the support and the opportunities he's given me along the way.

He's handed over a Company that is built on a solid foundation, with many exciting growth prospects that we've only begun to tap.

I wish Marijn the best as he takes on the top job at Bayer.

Turning to our Q3 performance I will review our financials at a high level, give you a sense of what we're seeing in our markets at this point in the year and highlight a few of the growth opportunities that are helping us to create long-term shareholder value.

First, the financials.

To sum up our Q3 results we're extremely pleased to report a continued trend of improving revenue and operating performance as the year has progressed.

Our results came in very much as we expected, keeping us solidly on track to achieve our financial goals for 2009.

Our reported revenues declined by 2% compared with the year-ago quarter.

Organic revenues also declined 2%; however, this was an improvement over the -5% we reported in Q2 of this year.

Although we haven't seen significant changes in the capital side of our business yet, we do believe the worst is behind us.

Sales of consumables, on the other hand, are recovering nicely and getting progressively better every quarter.

In Q3, sales of consumables grew better than 5% organically compared with the 1% organic growth we reported in Q2.

This was a major contributor to our overall revenue improvement for the Company.

We've also been able to leverage the top line to deliver good sequential margin improvement.

Compared with Q2, we improved our adjusted operating margin by 50-basis points, to 17.3%.

We're especially pleased that we were able to deliver adjusted EPS growth on both a sequential and year-to-year basis, with 4% growth in adjusted EPS over our 2008 results.

Two primary factors led the our improved profitability.

First, the increasing sales of consumables, were a key contributor.

Second, the cost-cutting actions that we began to implement at around this time last year are really taking hold.

This included selective layoffs, furloughs and site consolidations in certain parts of the Company, along with tight controls around discretionary spending Company wide.

These were difficult decisions and very carefully weighed, but I believe they were the right thing to do to ensure the long-term strength of the Company.

Of course we have a culture of continuous improvement through PPI, our Practical Process Improvement program.

This continues to create an ongoing focus on productivity improvement for our employees that is reflected in our results, as well.

Finally, we delivered on another strong quarter of free cash flow totaling $346 million, which is near record levels.

So our business model continues to generate a tremendous amount of cash.

We continue to use our cash to invest for growth in the long term and our acquisition of Brahms AG in the third quarter, which I'll talk about more in a few minutes, is a great example of that.

Let me now turn to a brief update on our key end markets and what we're seeing from our primary customer base.

In biopharma markets the key takeaway is sequential improvement.

The overall softness that we experienced with our large pharma customers is clearly abating and we've continued to see steady improvement since the beginning of the year.

In Q2, we told you that growth in our top 20 accounts was well in the mid single digits.

I'm pleased to report that we doubled that performance in Q3.

Long term we're confident that our leading position in the industry and our strong relationships with key accounts offers us a significant opportunity to serve these customers in a way that nobody else in our space can.

The tougher economic climate has actually been a good catalyst for change that should benefit our business model, which is based on more effective purchasing through our breadth of products and services and easier access through our extensive commercial channels.

In addition, we saw a nice uptick in our bioprocess container and media businesses, and sales of our bioreagents for life science research was also strong.

Turning to government and academic markets it's apparent that where innovation really makes a difference our customers are managing to find the money to buy these products in spite of the economy.

We had an excellent quarter in sales of our mass spectrometry systems for life science research.

As I've mentioned before we believe that roughly half of all mass spectrometry grants tied to stimulus programs have been written around our technology.

This could also play out well for sales of our reagents and consumables since they will be needed to support new mass spec installations over the long term.

Government stimulus is definitely a bright spot on the horizon but it's hard to predict exactly when the bulk of the monies will start to flow.

So far we haven't seen much here in the US, although some grant money is trickling in.

Our customers are confident they will be getting these funds and we should see some activity in Q4.

We expect the stimulus programs to benefit us most in 2010, and we remain confident that it's a $100 million to $200 million opportunity globally for Thermo Fisher over 12 months.

In addition, we've already seen some activity from stimulus programs in China and Japan, particularly around air quality, food safety and forensic applications, so these geographies offer another opportunity for positive growth momentum.

In healthcare markets we saw more stability this quarter than earlier in the year, as evidenced by much stronger sales of consumables, to hospitals through our healthcare catalog.

Also, the H1N1 flu, has led to a ramp up in sales of test kits provided by our microbiology and healthcare catalog businesses.

Last, industrial markets are relatively stable, similar to what we saw last quarter.

We do believe that we've seen the worst and that these markets have leveled off, albeit at a much, much lower level of activity.

At the moment we anticipate more of the same in Q4.

We expect to begin seeing some signs of a pickup in 2010 and the comparisons will certainly get easier then.

Let me mention that certain applied markets, such as food safety, continue to be the bright spot here, as we've seen throughout the year.

So overall, no dramatic changes in our key end markets.

Now I'd like to shift gears and talk about some of the highlights this quarter in our key long-term growth drivers.

When you really think about our capabilities, we have an incredibly unique combination all-in-one Company; one, an unmatched breadth of technologies, second extensive geographic presence and third the resources that come with size and scale.

It's this combination that differentiates us in our space and fuels our prospects for growth.

I'm excited about continuing our strategy by building on these strengths, as well as the solid foundation we've already established.

Let me give you some examples.

First, technology innovation continues to be one of our most important growth drivers.

We talked last quarter about the launch of our new thermo scientific LTQ Velos mass spectrometry platform, which includes our flagship Velos ION trap and Velos Orbitrap systems.

I visited the customer who installed our first Velos system to get his feedback and I can honestly tell you that he was raving about what this technology is doing for the field mass spectrometry, especially in proteomics.

He actually thanked us for developing Velos because of the amount of data and insight his researchers are able to glean from this level of analysis is quite remarkable.

I'm pleased to report that shipments of the new Velos platform since its June introduction at ASMS have been very strong and we expect orders to continue to accelerate.

Even beyond the introduction of Velos our Orbitrap continues to dominate the market.

We are also focused on strengthening our presence outside life sciences to more routine applications for our technology, such as food safety and clinical applications.

The second key growth driver is Asia where we continue to increase our market leading presence, especially in China and India.

Just to remind you we have nearly 1,000 employees in China today and although we're one of the largest players there in our space we still have a lot of opportunity for continued growth in the region.

As I mentioned earlier, we're seeing steady activity in air quality and food safety, some of which is related to government stimulus.

During the quarter our air quality business secured multiple large orders for continuous monitoring stations as part of the China National Air Quality Monitoring Network.

In food safety we were awarded for our role in helping Chinese laboratories quickly develop capabilities for detecting melamine in milk products and baby formula.

Orders have been very strong for us all year from state and local laboratories that need to comply with food quality standards mandated by China's version of the FDA.

To sum it up, we were pleased to report revenue growth in the high teens in China during Q3 despite a very difficult comparison with the year-ago period.

The third important element of our growth plan is our ability to make strategic acquisitions that complement our broad portfolio of technologies, the most recent being our addition of Brahms AG, a leading provider of specialty in vitro diagnostic tests.

The business is based near Berlin with 2008 revenues of about $105 million and approximately 400 employees.

Brahms tests are based on patented biomarkers for diagnosing various infections and disease.

It's a very exciting business, probably best known today for its premiere product, procalcitonin, or PCT, which is a biomarker for the early detection of sepsis.

Sepsis is a life-threatening condition in which a patient's bloodstream is overtaken by bacteria.

The PCT test has become the gold standard in Europe and with recent FDA clearance we plan to extend its use to the US market through our extensive channels here.

By leveraging our diagnostic sales force and our healthcare market catalog we have the ability to grow this business at a very rapid pace with very little incremental investment in commercial infrastructure.

Brahms also has a robust pipeline of proprietary biomarker tests in development for various heart conditions, as well as neurological disorders.

Let me remind you that our goal with diagnostics is -- our goal in diagnostics is not to compete with the broad suppliers, but to pick the specialty segments with attractive margins where we can be the clear leader, and Brahms fits perfectly in that strategy.

I'll also mention here, that our integration of Biolab, the leading laboratory channel in Australia and New Zealand, is going very well since we completed that acquisition in Q2.

This is a great example of our strategy to expand geographically in this part of our business.

To wrap up let me give you an update on our guidance for 2009, which we've refined now that we're in the last quarter of the year.

We are raising the midpoint of our annual revenue guidance and narrowing the range to $9.95 billion to $10.05 billion, which will be a decline of 4% to 5%, from our 2008 results.

This includes the negative effect of currency exchange and also includes the Brahms acquisition.

We're also raising the midpoint of our adjusted EPS guidance and narrowing the range by $0.15 to a new range of $2.95 to $3.05, which would lead to a 3% to 6% decrease from our 2008 results of $3.13.

So to summarize, I feel good about the progress we've made this year, especially our ability to return to adjusted EPS growth in spite of the top-line pressure.

Sales of consumables are growing again.

This, along with the prudent actions we've taken to control costs, positions us well to meet our financial goals for the year.

With that I'll now turn the call to Pete Wilver, our CFO, for his detailed revenues of the financials.

Pete?

Thanks, Marc.

Good morning, everyone.

As Marc said, our operating performance again improved significantly in the third quarter, despite continuing difficult economic conditions that affected our year-over-year comparisons.

We're especially pleased to have delivered positive growth in adjusted EPS in the quarter, reporting $0.78 in adjusted EPS, or 4% growth compared to $0.75 last year.

GAAP EPS in Q3 was $0.53 up, from $0.50 in the prior-year's quarter.

Moving on to the details of our financial results, reported revenues in Q3 declined 2% year over year to $2.53 billion.

Organic revenues also declined 2% in the quarter, excluding foreign currency translation of -2%, and 2% from acquisitions.

Our results in Q3 continued our trend of good sequential improvement in organic revenue growth driven primarily by mid single-digit organic growth in consumables.

Bookings in the quarter were essentially in line with revenues.

By segment, analytical technologies' Q3 revenues declined 6% on a reported basis and 4% organically.

In the quarter, demand across our instrumentation businesses, particularly those serving industrial markets, continued to be weak, although we did see sequential improvement over the second quarter.

On a further positive note, our specialty diagnostics and biosciences business had solid growth and new products continue to drive growth, specifically in our scientific instruments product line, as Marc mentioned if his comments.

In the laboratory products and services segment Q3 revenues grew 1% on both a reported and organic basis.

During the quarter we saw consumables growth return to prerecession levels.

This was partially offset by continued weakness in our routine laboratory equipment business although the year-over-year decline slowed from what we saw in Q2.

Looking at organic revenue growth by geography, Asia-Pac grew in the low single digits against a very tough comparison of growth in the mid teens last year.

Both North America and Europe declined at about the Company average and the rest of the world declined high single digits against a very tough comparison of almost 40% growth in the prior year.

Turning to adjusted operating income, Q3 decreased 4% year over year to $437 million.

Adjusted operating margin was 17.3%, down from 17.5% in the year-ago quarter but the good news that is that decline was just 20-basis points.

Year-over-year margin contraction resulted primarily from pull through on the organic volume decline at marginal rates, partially offset by favorable pricing actions, strong cost controls and infrastructure reduction actions, as well as our global sourcing and Practical Process Improvement efforts.

Adjusted operating margins again showed considerable improvement sequentially, up 50-basis points from Q2 as revenue strengthened and our cost reduction actions continued to take hold.

By segment, analytical technologies' Q3 adjusted operating income decreased by 11% year over year, and adjusted operating margin was 19.9%, down 120-basis points versus 21.1% last year.

Laboratory products and services Q3 adjusted operating income increased by 4%, and adjusted operating margin was 14.4%, up 40-basis points versus 14% in the 2008 quarter.

Moving to the details of the P&L, total Company adjusted gross margin was 41.2% in Q3, up ten basis points from the year-ago quarter.

This was primarily a result of increased prices and our global sourcing and cost reduction initiatives, partially offset by impact of lower volume.

Adjusted SG&A was 21.5% of revenue in Q3, up 30-basis points from 21.2% in the year-ago quarter, as cost controls and cost reduction actions were offset by negative volume leverage and slightly higher stock compensation expense.

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

We intend to maintain our spending level for technology development consistent with 2008 to ensure that we preserve our new product pipeline to drive future growth.

During Q3 we maintained our program of tight discretionary cost controls and have continued to implement infrastructure cost reduction projects consistent with the plan we laid out at our May analysts meeting.

As we commented last quarter, these actions are focused on the portions of the business that are most directly affected by the economic downturn or where we would like to reduce our manufacturing footprint.

We continue to invest in our key growth opportunities to ensure we are positioned to emerge from the recession as an even stronger industry leader.

Moving below the line, our Q3 adjusted net interest expense increased $2 million year over year to $27 million, as a much less favorable interest income environment more than offset a $600 million reduction in our net debt.

Other income was a gain of $1 million, up $3 million from last year, primarily as a result of lower currency transaction losses, on foreign entity cash.

Our adjusted tax rate for the quarter was 20%, flat with Q2 and down three points from Q3 2008.

The lower tax rate versus last year resulted primarily from the tax planning that we implemented during the second half of 2008, and so far this year, along with lower overall pretax income, particularly in high tax jurisdictions.

Average diluted shares were 420 million in the quarter, down 18 million from last year.

The lower share count reflects the benefit of our share buyback programs in 2008 and 2009, as well as lower convertible dilution resulting from a lower stock price.

Our cash flow performance remains very strong.

Year-to-date free cash flow from continuing ops exceeded $1 billion after deducting net capital expenditures of $116 million.

Year-to-date free cash flow was up $194 million versus 2008, primarily as a result of lower working capital.

We ended the quarter with $1.76 billion in cash and investments, up $330 million from Q2, primarily as a result of our free cash flow.

Our total debt was $2.02 billion, essentially flat with Q2.

Shortly after quarter end we closed on the Brahms acquisition, which we funded with $450 million of our European cash.

We also assumed about $30 million of debt.

With regard to working capital, we had a good performance in the quarter given the economic climate.

Accounts receivable day sales outstanding was 53 days, down one day from the prior year and flat with Q2.

And inventory days of supply was 71 days, down three days from the prior year and down two days sequentially from Q2.

Moving on to our 2009 guidance, we are raising the midpoint and narrowing our reported revenue guidance from a range of $9.80 billion to $10.10 billion to range of $9.95 billion to $10.05 billion.

The increase in the midpoint from our previous guidance is primarily as a result of more favorable foreign currency translation and the addition of the Brahms acquisition.

Our guidance assumes present foreign currency exchange rates, which are negatively affecting our reported revenue growth guidance by about 2%.

It also assumes about 1.5% net growth from past acquisitions and divestitures.

This new range represents a decline of 4% to 5% compared to our 2008 reported revenues of $10.5 billion.

On an organic basis our new full-year revenue guidance translates to decline of about 4%, which remains within the previous guidance range of -2% to -5%.

In terms of adjusted EPS we are raising the low end of our previous guidance by $0.10 and lowering the high end by $0.05, resulting in a higher midpoint and a much narrower range of $2.95 to $3.05 compared to our previous guidance range of $2.85 to $3.10.

This range represents a 3% to 6% decline compared to our 2008 adjusted EPS of $3.13.

In interpreting our revenue and adjusted EPS guidance ranges you should focus on the midpoint as our most likely view of how we see 2009 playing out.

Outcomes above and below the midpoint will be dependent upon the relative strength of the economic recovery and the magnitude of incremental stimulus revenue that we are able to convert by year end.

As always our guidance does not include any other significant assumptions with regard to potential future acquisitions, share buybacks or other uses of capital.

In summary, we've been delivering strong sequential improvement in our operating performance through the year, which positions us well to achieve our 2009 financial goals.

We continue to believe we're striking the right balance between cost reductions and strategic investments, and as a result are well positioned to emerge from this period as an even stronger industry leader.

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

(Operator Instructions).

Your first question comes from the line of Ross Muken of Deutsche Bank, please proceed.

Good morning and I want to start off by saying congrats, Marc, on the new position.

I think I speak for a broad audience given the e-mail flow.

I think you did pretty well on your first official conference call.

In terms of the commentary it seems like the general theme is stability to improvement across most of the end markets, so I guess certainly these were good numbers and the consumables being up where they were I think is pretty encouraging going forward.

I guess the key point, at least that I'm focused on, is the trajectory of more of the equipment and instrumentation businesses.

If we look to other reports across the third quarter it seems like a lot of early cycle companies are starting to see some general interest, how far do you think you lag across the different businesses and where will you start to see activity first, so that the commentary on some of the industrial markets isn't very, very slow or a slight improvement as opposed to more significant?

And in turn, how do you -- the activity you're seeing or the order rates or whatever your -- the sales force is saying, how is that comparing to the last cycle we came out of?

I know it's tough because this was a much deeper decline, but I'm just trying to get a sense for where you think we are and when you think we'll have more visibility to an improvement and what business units will see it first?

Thanks, Ross.

As I think about the industrial end market and the focus on the capital equipment side of things, clearly these are segments from an economic cycle that are going to lag by at least a couple quarters, so you need to be in a strengthening economy and then you start to see the effects of capital flow into these types of products.

More instrumentation and then especially those instrumentation that are related to capacity expansion.

So they definitely are lagging general economic cycle and that we've known over the many, many years in owning these businesses or running these businesses.

When we look at that today clearly we see the fourth quarter looking very similar to the third quarter in terms of low levels of activity.

The comparisons get easier in 2010, but right now we're not forecasting a very robust economy, so I think you're going to have easier comparisons but we're still waiting for more GDP-driven economic growth to really drive that demand.

As in everything there are certain applied markets that are doing well.

Food safety has been a nice driver for us, even in a difficult environment.

Around the world we've seen a lot of demand in that area.

And then, more broadly in our instrumentation business, mass spectrometry, as I mentioned in my prepared remarks, continues to do well despite the fact that those are high priced in terms of ticket price for those instruments, often selling at $0.5 million.

We've had very good demand for them because the innovation there is just so incredibly profound.

So from that respect there's a few bright spots, but we're looking at certainly not until 2010 to see easier comparisons the industrial customer order base.

Great, thank you very much.

Sure, Ross.

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

Baird, please proceed.

Good morning, Quintin.

Good morning.

Nice quarter and congratulations from us, as well, Marc.

With respect to just maybe a higher level, we see more acquisition-based strategies showing up, like Agilent and Danaher coming into the space, Marc, from a high level what are some of the challenges that you see as Thermo for the next few years with respect to like M&A?

And then as a follow up to that tell us a little bit about Brahms and what attracted you to that segment?

Thanks, Quintin.

So as I look at the acquisition landscape, which is clearly accelerated over the last couple of quarters, I think it is probably useful to say, first, how do we think about M&A and how do we evaluate M&A and then talk more about the broader landscape.

When you look at our M&A strategy the first thing that we look at is, does doing an acquisition strengthen the Company's offering for our customers?

Does adding a capability, make a meaningful difference for our customers?

If the answer is clearly yes to that question we come to the second question, which is -- of very, very significant importance, which is can we generate significant shareholder returns on that use of capital?

If the answer to that is you then come down to the question of availability and those things.

But we use the filter, we don't need to get bigger for the sense of bigger but we do look at deals actively to strengthen our Company's offering to our customers and generate returns for our shareholders.

So that's the high-level view.

Brahms fits very, very well within those criteria.

We have an excellent set of capabilities in specialty diagnostics.

We have leadership positions in the niches that we play.

We have incredible reach to the market through our direct sales force, through our OEM relationships, through our healthcare channel business, and when you look at Brahms they have not only a product that's going to be commercialized in the US after building a nice set of momentum in Europe -- and we have incredible reach to the market -- but they have a very attractive pipeline of R&D pipeline with their biomarkers, which gives us not only the ability to generate short-to-midterm growth but also to have long-term growth from that acquisition.

So we feel very good about an acquisition like Brahms.

All right, thanks.

I'll jump back in the queue.

Your next question is from the line of Derik De Bruin of UBS, please proceed.

Good morning, Derik.

Morning, how are you?

Very well, thanks.

Great and congratulation on the new position.

Just a -- Pete, did you comment on the equipment organic revenue growth rate and could you differentiate between the industrial and the life sciences growth in those businesses.

We didn't say what the equipment growth rate was, but it certainly is better than Q2.

In Q2 we reported mid single -- excuse me, mid teens decline and it was more like high single digit decline in Q3, so it improved, as well as the consumables.

And --

I don't really have a differentiation between the industrial versus the life science but I -- certainly the industrial is getting hit a lot harder on the life sciences side.

And I guess just one other question on the equipment space.

The -- you commented on the mass spec shipment in the quarter, were all those recognized during the quarter that you shipped?

The -- when you look at -- when we say shipments those would be recognized.

Okay.

And I guess, could you talk a little bit about the -- there's been some -- I think some of your competitors have been commenting on the Orbitrap and that going after it with some of the new product launches, could you talk about what you see in the dynamics of the market.

Is there pricing pressure?

I was pretty taken by the comment that you felt like half the stimulus grants on mass spec -- that were using mass spec were employing your technology, could you just give a little bit more color on that comment in terms of how you get that and just the overall pricing environment and what you see in the competitive landscape in that space?

Sure.

As you look -- first of all, we had a very exciting launches at the American Society of Mass Spectrometry conference in June.

That translated into a very quick take off in bookings and ultimately shipments because the product was ready to go, and that helped our results in the quarter that we just reported.

Really, within those orders and shipments there was nothing that came from stimulus in those numbers, so that's a positive on the horizon.

Our view on that is probably more meaningful in 2010 than in the fourth quarter.

We've done surveys, we've read surveys, we've talked to our customers, we've written and helped write a lot of grants, so we have a pretty good sense of what's going on in the mass spectrometry landscape.

And when you look at the number of grants written, about half, it appears, were written around our technology so we feel good about that.

And we feel good about the fact that our customers, even the early read is that the technology is so profound that even those customers' pre-stimulus money is actually going out and buying these products.

So, we always -- we keep a close eye on the competition, we've got good tough competitors, but the early read is not a surprise to us, which is our product looks to be very, very well received in the market.

Thanks, I'll get back in the queue.

Your next question comes from the line of tycho Peterson with JPMorgan, please proceed.

Good morning, Tycho.

Hey, good morning, and my congrats, as well.

Thank you.

Maybe just a question on the consumable performance.

Obviously you seen good strength here sequentially throughout the year, can you just comment on how much of this is market-related versus share shift?

And also maybe if you can add some comment about mix, whether you're emphasizing consumables a little bit more?

Based on your comments on the top 20 pharma -- or biopharma accounts it seems like obviously you're pulling a lot of share so just wondering if that's accelerated in the last couple quarters?

I'll start and then I think Pete will add, as well.

When you look at the consumable performance, we clearly had strengthening in the hospital customer base.

Part of that is driven by preparation for H1N1 and that helps both microbiology and our healthcare businesses.

We also saw strength within biopharma customers, particularly in both our life science research reagents, as well as our bioprocess media and plastic containers, sterile containers, if you will.

So, we saw a nice pick up in both biopharma and hospitals.

We're not emphasizing consumables more than capital equipment, so it's less that and consumables are more reflective that activity is starting to pick up at a customer level but that capital budgets still remain tight.

One other data point is flu came in significantly stronger than we had expected.

We picked up almost $20 million in revenue incrementally year over year in flu in Q3, so obviously that was a nice benefit to the organic growth rate.

Okay.

And then just on the acquisition questions you before,, is it fair to assume diagnostics are going to continue to be a focus area given Brahms and your comments previously?

As you look at the Company we like our growth platforms -- the six growth platforms that we have very much and that's our customer channels and our products and services, as well biopharma services, analytical instruments, specialty diagnostics and bioscience reagents, so I think you should look at us not favoring one of our six children more than another, if you will, but looking at the right things to strengthen our offering.

We really do like those businesses.

There was a great opportunity in specialty diagnostics that we made a meaningful acquisition last quarter, but the quarter before when we bought Biolab with a great acquisition for our customer channels business and had the same type of rationale of strengthening for our competitiveness and we made a move there.

Larger deals are clearly going to be focused on analytical instruments, biosciences and specialty diagnostics.

The bolt-ons would be more on the lab products and services.

If you want to think about size of transactions you're going to see larger emphasis if they become available in the right -- on the higher tech portion of our Company.

Great, that's helpful.

Thank you very much.

Sure.

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

Good morning.

Hey, good morning, thank you for taking the call and congratulations on the quarter and to you, Marc, as well.

Thanks.

So just to follow up on the consumable question, that is was actually where I was going to go.

How much of this would you -- the flu obviously is maybe not repeatable, hospitals were in a severely destocking in the first six months of the year so there's restocking going on.

So I guess the question is, how confident are you that this above average growth -- getting back to average or above average growth of 5%, north of 5% is sustainable?

When we look at the hospital portion -- and, hold flu aside for a moment -- we don't believe that there was a big restocking activity that went on in the period but more representative -- representative of usage, Jon, in terms of what happened.

A number of our team went out and talked to customers about what are they doing, including me going to a couple of our large customers and said what's going on from a behavioral standpoint, and clearly they took inventory levels done.

Nobody's going to rush to rebuild inventories, I don't expect that really to happen in a meaningful way at any point in time.

I think customers are just going to expect suppliers to meet their needs and not have to carry buffers on site, so that's how I think about that issue.

In terms of the sustainability, our view on flu that is the fourth quarter is likely to be at least comparable to last year's, which was a strong flu quarter, if not better because you have two different strains of flu going on out there so that should be a continuation.

And then obviously it is hard to predict what that means for the future getting beyond Q4 in terms of what the flu really represents.

Okay, that's helpful.

So your view, if I were to extrapolate, would be you don't really see restocking.

More usage related to flu obviously is a bit of a wild card, but on the other you think it is more -- you're stabilizing at this level in terms of usage and it's not necessary that it's restocking that's going on in the quarter?

I agree.

Okay.

And then, Pete, can you maybe -- I know service revenue has actually been one that kind of slides under the radar in terms of growth.

I know it's actually been kind of weak.

Did you see any improvement there in terms of maybe some utilization coming back on line, or what's going on with service revenues?

Yes, actually service revenue was probably the one low point in the quarter.

We saw a mid single-digit decline in service versus low single digits the first and second quarter, so it actually deteriorated a little bit.

Some of that was just a tougher comp in Q3, but the areas of weakness were really -- the industrial side of our equipment business, those service revenues are particularly weak right now and we're also seeing a little bit of reluctance on the part of our biopharma customers to do large outsourcing projects, which is impacting some of our biopharma services business.

So I think this is not necessarily indicative of a new trend here, it's probably one of -- the weakest data point we expect to see, but certainly a little bit of a disappointment for us this quarter.

Okay, thanks.

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

Good morning, Marshall.

Yes, good morning, thanks for taking the question, guys.

So a few questions -- a lot of questions on consumables, I just wanted to confirm one point here.

Last quarter you guys had talked about things getting better throughout the quarter on the consumable side, so is that 5% you talked about is that stabilizing here, and was that consistent through the quarter or were things still improving?

I would say consistent through the quarter.

When we were doing investor conferences in -- about a month ago our view then is pretty much our view now, is what we saw throughout the quarter was pretty consistent and that resulted in the 5% roughly organic growth for consumables.

Okay, thanks.

And then second question, as you started to think about next year, the cost-cutting and furlough programs guys have put in place, how much do you guys think if things start to get better next year, both organically and also just on comps I guess, too, to what extent are you guys happy with where the cost structure is now and how much upside will -- can we think about flowing through from the big picture perspective versus places you guys feel like you've held back and would want to reinvest as we start to think about 2010?

Well, I think we're happy with the cost structure for the level of revenue that we're at today.

The wild card for 2010 is obviously things like you just said, the furloughs and some of the more discretionary tight cost controls, which are doable in the short term but long term you can't just cut out all travel and those types of things.

So some of that is going to come back into the P&L in 2010 assuming that we have -- even really if we stay at the revenue levels that we are today.

So we're going to get headwind from that.

And in terms of investing, incrementally to that I think it will be in synch with what we see in terms revenue.

As revenues start to creep up we'll reinvest in the areas that we think we need to invest in.

So that won't be a drag to the P&L, it'll really just be those things that were sort of artificial in 2009.

Any way you can quantify that or help us to think about how much of a headwind that is?

In terms of the discretionary and the furloughs, it's probably something in the range of 30 or 40-basis points of headwind depending on how that plays out.

Okay, great.

Thanks a lot guys.

You're welcome.

Your next question comes from the line of Doug Schenkel of Cowen and Company, please proceed.

Good morning, Doug.

Hey, good morning, and congrats again, Marc.

Thank you.

You guys guided stimulus benefits to $100 million to $200 million over next 12 months, it sounds like that is a worldwide number, any chance you would give us any details on what you think the US contribution can be, and as part of the question could -- or part of answering the question could you maybe talk about what of that is instruments and infrastructure versus consumables?

Yes, in terms of the details of that number, that's obviously a very, very high level number and at this point, we don't have it at that level of detail in terms of a forecast.

It's very difficult, even on an actual basis, to know what those numbers are --

Okay.

-- so it's --

But it -- would it be fair to assume that maybe it's a little easier to take a look at instruments and infrastructure and that the consumables side is a little more squishy because takes a little longer to flow through?

Certainly, yes.

The equipment and instrument side of the equation is pretty easily identifiable but the other piece is pretty tough.

Okay.

And you -- again, and we've talked about this a few times already but you guys had a good consumables quarter.

I was wondering if there was potentially any negative impact on consumables in the quarter from having a late Labor Day, especially on the research side?

And maybe I can just ask one clean-up and I'll get back in the queue as a follow up.

What were the days comparisons in the third quarter and what's that look like in the fourth quarter?

Thank you.

Sure.

In the third quarter, the days were the same as last year so no impact and we don't believe that the late Labor Day had any material impact on the numbers.

And in Q4 we pick up one day year over year.

Okay, thanks again.

Your next questions from the line of Isaac Ro of Leerink Swann, please proceed.

Good morning, Isaac.

Good morning, thanks for taking the question.

I just wanted to think a little bit for a minute about the longer-term opportunities for Thermo as you take the helm here and specifically looking at expansion of overseas.

Distribution and assets, that's been a theme this year, I'm wondering -- in terms of your M&A activity and I'm wondering if you see any specific emerging markets where making cross border-type acquisitions are particularly challenging versus others and as a result how does how does that inform your plans to grow the business on a build versus buy approach?

It's a great question.

As we look at our expansion geographically we always start with a build versus buy and which is going to generate the best shareholder returns and you're often trading off a time to market versus a large up front capital outlay on a relative basis.

So we do that tradeoff each case, and then you also look at the environment and say, if you wanted to do a buy strategy to jump start growth are there available assets that could really help you and is the environment such that you feel good about it.

We have been comfortable doing some M&A in India in terms of how we've approached it and we've bought some good companies that have helped us there.

We obviously were comfortable in Australia and New Zealand and we've done the same small deal in Malaysia, so there've been a number of markets that we have gone in that route.

There are also markets that we've been much more of develop it yourself.

China is an example where very dramatic investments of building our infrastructure in terms of a make versus buy.

We have supplemented a lot of our acquisitions in India with very heavy investments to build our capabilities.

And in a country like Ireland, certainly not Asia, with we chose to do make strategy and really build out our presence there from the ground up.

Great, okay.

Then if you think about the relative opportunity in the long run for India, obviously China has been a great market for you but I'm wondering does India present the same type of opportunity over the long run given the footprint maybe in the generics field and maybe future growth for biosimilars, that kind of that, or do you see still China as your larger opportunity?

I think both are very significant opportunities for the Company.

They have different emphasis points.

India is clearly much more of a life science orientation to what our business is developing to be, and China is much more balanced in terms of having a reasonably-high industrial safety quality focus.

So you have -- you also have life science demand but you also have a lot of demand for things like air quality monitoring and process instruments and portable analyzers, a lot of infrastructure support and quality support.

So, in a way it's growing a little bit more quickly because you're firing on more cylinders than just life sciences, but we're very excited about the long-term prospects for India because of the life science investment that's clearly going to go on there.

Right, thanks.

Last question I'll ask here is on the mass spec side.

Some of your major competitors are in flux right now with M&A deals they're trying to close and you mentioned the strength that you're seeing in Orbitrap Velos for non-stimulus-type customers, so I'm wondering if you see a meaningful opportunity to pick up some management share, at least in the near term, in that business?

We have a very good offering, we have a terrific team, we have a great set of technologies and a loyal set of customers and I think that positions us well in our mass spec business.

And we also have tough competitors and we wake up every day and make sure that we're running our business the best we possibly can to make sure that our customers select our product versus the competitors out there.

So we certainly try to gain share, we feel good about our technology but we never underestimate the tough competition that's out there.

Thanks very much.

You're welcome.

Your next question comes from the line of Peter Lawson of Thomas Weisel Partners, please proceed.

Good morning, Peter.

Morning and congratulations, Marc --

Thank you.

-- from all of us at TWP.

I just wonder if you can walk through how you're going to run the Company differently and what things you're going to emphasize more or less versus Marijn and the plans for the first year?

Thanks.

So the first -- that's a good question and one that a month ago or so when I went out on a first road show, post announcement, I spent a lot of time talking about and I think it's worthwhile repeating some of the themes that I communicated at one of the conferences.

The first of which is that Marijn, Pete and I have worked together very closely for the last eight years in developing and executing the Company strategy and certainly Pete and I feel great ownership, as does the rest of the leadership team, in our strategy as being the world leader in serving science and the growth drivers that come with it.

So from a strategic perspective we feel very comfortable with this direction.

We feel great ownership in developing that strategy and executing against it.

When you look at what are we trying to accomplish we obviously want to leverage those unique capabilities to grow our business and continue to gain strength with our customers.

We're very focused on Asia, we're very focused on innovation as two areas, but those were focuses that we had in the past, so it's things that, I think, in these markets that are very important to continue to focus on and we will.

When I look at changes, probably the one change -- I'll just do a quick update because there was a question that was more difficult to answer a month ago, in the transition, which is what happened to the Chief Operating Officer position that I had filled and in that particular case, I chose not to replace that position given the strength of our leadership team that we have in the Company.

Most of our investors have had exposure in our annual analysts meeting to our group presidents and members of our management team and our group presidents and the rest of the leadership team will be picking up those responsibilities as Chief Operating Officers.

That's the -- really the only change that I would say has happened in a meaningful way since the last interaction with investors, but the strategy is one we're very energized by.

Marc, you previously mentioned that business has been bouncing along the bottom, have we moved along that now?

No, I think I -- I didn't use the exact same words but I had the exact same meaning.

When you look at the industrial side of the business, which is where I was focusing those comments, that's where we feel we are.

Early in the year you had this continued deceleration of the business, it stabilized.

It continues to be stable but at much, much lower levels of activity so we feel that that is bouncing along the bottom.

As we look to Q4, as I mentioned earlier, we feel like it's going to be the same and then what you wind up having is that the comparison's getting easier so even if demand doesn't necessarily change much you wind up just reporting better sets of numbers just because of the comparison.

Okay, thank you so much.

You're welcome.

(Operator Instructions).

Your next question comes from the line of Rob Hawkins with Stifel Nicolaus, please proceed.

Thank you.

Good morning.

Good morning.

If we can I might just maybe parse some of your comments retted to the NIH stimulus, the $100 million to $200 million, from comments made by you and others related to typical academic budget.

For 2009 a lot of these guys in prior quarters were hoarding their cash waiting to see what happened with the stimulus and holding off on purchases.

Now the first wave of awards have been made now what is your thought?

Are we going to see a big rush to spend money here in the fourth quarter, where are you guys thinking about that and do you think that's going to help instruments, maybe how that might play out?

We -- from our view and obviously you're dealing with many, many customers and many, many grants so it's hard to totally generalize, but our view is that customers aren't going to rush out.

They have deadlines of when they have to spend their money by so it's not as if they can sit on the money forever.

But our view is that, in a tougher environment, where endowments are tough and customers are worried about where their funds sources are they're going to be thoughtful about how they spend their money.

They're obviously going to follow what they wrote in their grants and our belief is that we'll see some flow of funds in Q4 based on the discussions we've had but that it's going to pick up more meaningfully in 2010, particularly in the first half of 2010.

That's our best read as of today.

All right.

I will jump back in the queue.

Operator, I think we have time for one more question.

(Operator Instructions).

You have a follow-up question from line of Rob Harkins, please proceed.

Well, since no one else asked can we talk a little bit then about the Brahms and the sepsis kits.

You've given us -- you're going to do this bioreference labs and then you have these other products, have you guys disclosed a timeline maybe for some of the CV and these other products in terms of -- a broad timeline in terms of when maybe some of these things might be approved?

No, I think when we thought about the acquisition and the price that we paid and the returns we generated we made an assumption that effectively you get nothing from the pipeline.

Not that we believe that, but that we believe that we can commercialize what has been cleared by the FDA and generate appropriate returns based on that.

We're very excited about the pipeline that happens but it's very hard to speculate on where those flow through regulatory processes and I don't think we would expect to have anything meaningful in terms of revenue from that in the near future.

However, you may see some launches of those products as they go through regulatory clearance, maybe even in the near term, but you have to develop markets and those things.

So a view of that of more of a discussion probably late 2010 to give you an outlook on that for future years and not something that's going have any impact on the next year or so.

All right, thanks.

Thanks great color.

Let me make a couple closing comments.

First of all, we are pleased with our steady improvement in revenue and operating performance as the year has progressed.

We're also for excited than ever about our long-term growth profit prospects thanks to our continued investments in technology, global expansion and complementary acquisition.

Thanks for listening today.

We look forward to reporting our year-end results on our next call.

Thanks.

Thank you for joining today's conference.

This concludes the presentation, you may now disconnect.

Good day.