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Millipore Corporation (NYSE:MIL)

Q4 2008 Earnings Call Transcript

February 5, 2009 4:45 pm ET

Executives

Joshua Young – Director, IR

Martin Madaus – Chairman, President and CEO

Charlie Wagner – Corporate VP and CFO

Analysts

Jon Wood – Banc of America Securities

Abigail Darby – JPMorgan

Derik De Bruin – UBS

Ross Muken – Deutsche Bank

Dan Leonard – First Analysis

Jodi Dai – Leerink Swann

Paul Li – Brown Advisory

Operator

Good afternoon. My name is Christian and I will be your conference operator today. At this time I would like to welcome everyone to the Millipore Fourth Quarter Full Year 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) Thank you.

I would now like to turn the call over to Mr. Joshua Young, Director of Investor Relations for Millipore. Please go ahead, sir.

Joshua Young

Thank you very much. Good evening. I would like to welcome everyone to Millipore’s fourth quarter 2008 earnings conference call. My name is Joshua Young and I am the Director of Investor Relations for Millipore.

Joining me on today’s call are Martin Madaus, Chairman, President and CEO; and Charlie Wagner, Chief Financial Officer.

In addition to Monday's acquisition announcement and the earnings release we issued earlier today, we will also be referencing a slide presentation as part of today’s call. The presentation can be viewed by clicking on the webcast link on millipore.com, or by accessing Millipore’s investor relations website. A PDF copy of the slides will be posted to our website after the call.

We will also be highlighting non-GAAP information. A reconciliation of our GAAP financials to our non-GAAP financial measures will be posted on the website after the call as well.

Before we begin, I will make the usual Safe Harbor statement that during the course of this conference call, we will make forward-looking statements regarding future events or the financial performance of the company that involves risks and uncertainties. The company’s actual results may differ materially from the projections described in such statements. Factors that might cause such differences include but are not limited to those discussed in today’s earnings release and in our Form 10-K, as well as other subsequent SEC filings.

Also note that the following information is related to current business conditions and our outlook as of today, February 5, 2009. Consistent with our prior practice, we do not intend to update our projections based on new information, future events or other reasons prior to the release of our first quarter 2009 financial results in late April.

Now, I would like to turn the call over to Martin Madaus.

Martin Madaus

Thanks, Joshua; and good evening. I will speak briefly about the fourth-quarter results before giving you a more detailed commentary about our 2008 performance.

Millipore's financial results in the fourth quarter were in line with our expectations. The Bioscience division delivered strong performance, while the Bioprocess division reported a modest decline in revenues. We generated – I would say outstanding free cash flow while adapting our cost structure and making investments for long-term growth.

Fourth quarter revenues were approximately $397 million, which represents a 2% decline from last year. If we exclude changes in foreign currency rates, revenues in the quarter grew about 2%. For the full year 2008, we reported revenues of approximately $1.6 billion, which represents 5% growth. Excluding changes in foreign currency exchange rates, revenues grew 1% in 2008 and on this slide you can see now I show our reported revenues since 2004. We really have become a more innovative company and we really added very important scale to our business are generating about 16% compound annual growth rate during that time.

I would characterize the fourth quarter similar to the way I would characterize Millipore's performance during the last 12 months. Clearly, 2008 was a tough year. It was a year in which we faced challenges in our largest biotech accounts, resulting into a disappointing top line growth. But despite these difficult circumstances, I am very proud how Millipore employees responded to the challenges and executed initiatives quickly that helped us to align our cost structure and compensate for lower revenue growth. Additionally, we also launched a program to improve our working capital and we saw the early results from these efforts in Q4 as inventory and accounts receivable were sources of cash flow for the company. Now these efforts, combined with strong revenue growth from our Bioscience division enabled us to deliver a 60% increase in our free cash flow and generate 7% growth in non-GAAP earnings per share.

So think about this, during a year in which our largest division reported a sharp decline in revenues, these financial results are solid. We effectively balanced delivering improvements in earnings and cash flow while also very important investing for future growth. I have spoken before to you about the importance of this new balance that we have established on our business portfolio and the advantages that we have now with a more diversified business compared to our business portfolio from a few years ago. And I started about four years ago in January 2005. Roughly 40% of our revenues were derived from the Bioscience division. At the time, we made the strategic decision to increase our exposure to bioscience markets and today, approximately 45% of our revenues come from Bioscience and the division has almost doubled its revenues during that period of about four years. So not only is the division a higher percentage of our revenues, but also has consistently generated mid to high single-digit organic revenue growth since 2004.

So as we look back at 2008, the greater exposure and scale we built in Bioscience has attracted financial performance despite Bioprocess revenues. After seeing a significant decline in the first half of the year, we started to see our Bioprocess division stabilize in the second half of 2008 with revenue dynamics at some of our large key accounts improved. We believe that the division will return to organic growth beginning in the first quarter of 2009. I will elaborate our reasons for this outlook later in the call.

We continue to accelerate our product innovation in 2008. We achieved this improvement through both internal R&D and also the execution of several strategic partnerships. What we are doing today is we are leveraging our extended capabilities in both divisions to create products that drive value and efficiency improvements for our customers. It is really a huge step forward that I see today and that was really the much better part of development productivity that we have seen in 2008 and the resulting much better return from our R&D investments.

And to illustrate this point, I would like to give you two examples out of many. First, Bioprocess. In our Bioprocess division we launched a new viral clearance product called Viresolve Pro. This product is used by biopharmaceutical manufacturers as part of their overall virus safety program and Viresolve Pro delivers significantly greater benefits than any other competitive product used for virus removal. So as a result, we saw that some of our customers who were in late stage development clinical trials switched from their current products to Viresolve Pro. And if you know the industry, you know this is really rare in our industry as most customers simply don't make changes in late stage of clinical development and the fact that customers are incorporating Viresolve during the late stage development speaks for the substantial innovation that this product really delivers.

In our Bioscience division, the introduction of Snap.i.d. was very successful. This is a protein detection system used by researchers to Western blotting and it strips down the time of usually four hours to half an hour. It has been very well received by our customers. We more than doubled our annual sales target for Snap.i.d. which significantly exceeded already high expectations. So I point to Snap.i.d. and Viresolve as really tangible examples of how we are growing the Millipore franchise in attractive markets and how we are accelerating the rate at which we bring new and innovative products to the market from our own internal R&D efforts.

Another big progress and I would say key accomplishment certainly during the year was a tremendous improvement we made on our website and our e-business platform. As you know, the Internet is critical as a sales channel especially for the Bioscience business, and during 2008, our Internet sales grew by 30%. Additionally we established key discussion forums and added very interactive content to make millipore.com a key destination for scientists. So continuing to leverage the website will be a very important part of our future growth strategy. So please, check us out at millipore.com.

So in summary, I would sum up 2008 as the year where Millipore stayed on course, continued to execute its strategy despite the difficulties we faced in the market. We have a great position in growing markets and our products are indispensable to our customers work. We are very much focused on expanding and growing our franchise in new markets as we enter 2009 and our entry into the (inaudible) market is a very good example for the type of expansion that we are targeting.

Now I would like to go into a little bit more detail for the fourth quarter and also the year, starting with the Bioscience division. Excluding changes in foreign currency exchange rate, Bioscience generated 7% growth in the fourth quarter and 6% growth in 2008, but if you adjust for the elimination of a small and unprofitable product line of Bioscience, real growth was 8% in the quarter and 7% for the full year 2008. The division closed out the year very strong, solid fourth quarter performance in the Lab Water business. It continues to be a primary driver of growth in the division. Lab Water again had a great year and met our expectations for instrument placements in Q4 and for the full year. In Lab Water, about 60% of the Lab Water revenues come from consumable and service and 40% of our sales were derived from instrumentation and it remains strong.

Many times when I talk to you, I get questions about Lab Water like this, why does Lab Water continue to perform so well? Well, I would point to three main reasons for the performance. First, Lab Water is really directly benefiting from the success of the business units’ new product launches. We had a number of new product launches over the last years that continues in 2009 and our major new product launch this year, which started at the end of 2008 was Milli-Q Integral, had a strong second half of the year and exceeded our expectations for the number of units sold. And like most of the Lab Water instruments, Milli-Q Integral is not really a capital purchase. It is priced at around $12,000 and these affordable top-quality instruments continue to grow very nicely. Second point in Lab Water, is most of the growth in the Lab Water business comes from the consumable and service part of our business and the strong growth of our Lab Water service business has helped to drive consumables consumption and provided good visibility into this business. And finally, this is where the global footprint of Millipore comes in, we are seeing solid growth outside the United States and Europe, particularly in countries like China and we are investing heavily there in the bioscience markets.

Moving on to Drug Discovery, for the second straight year, Drug Discovery was the fastest growing business in the Bioscience portfolio, delivering healthy double-digit growth, obviously from a smaller base. Leading service and products over here, biopharma services, the Multiplex Immuno assay kits, and our chance is obviously to continue with a strong growth for Drug Discovery. Drug Discovery today is about 5% of the total company's revenue.

Moving onto Life Sciences, Life Sciences is about 22% of our total revenues. They generated strong performance in several key markets and closed the year strong. We had good success with the new products, Snap.i.d. I already talked about, but also Guava helped to deliver very good growth in 2008.

Our Biotools business, which consists of a range of widely used high precision lab filtration products, also had a solid year, which is indicative for a healthy level of research activity in the market. I think it is important for investors to remember that our strategy in Bioscience is not to be a broad catalogue type provider. We are focusing in areas of the market such as protein research and cell biology. Our technical expertise, our quality in our brand helps to differentiate us from the competition. And this is important to recognize because we are hearing about some CapEx and research from large pharma but many of the same companies are accelerating investments into cell biology and protein research where we have a strong position.

I mentioned earlier that we have made significant progress in strengthening our website as a sales channel for Millipore and the Internet is extremely important to the Life Science division as most scientists today are purchasing not only antibodies and Biotools and kits, they will be purchasing most of their products over the web. And over the past few months, we have improved the merchandising and the interactivity of the website and scientists can now interact and explore with the cell signaling pathways and participate in discussions forum with those scientists. I think these improvements we have made to the web will draw scientists to millipore.com and they will investigate research topics there. That creates more visibility for our products and over time, that will help us to drive growth of our Life Science business unit.

So when you look at the Bioscience division as a whole and I show this on this slide. I show a snapshot based basically of how we transformed the Bioscience division over the past four years. In 2005, we basically provided high-quality devices across a range of research applications that with the acquisition of Serologicals in 2006, we really gained content to provide deep and differentiated solutions to scientists became much more relevant overall to their work, what we call workflows. In fact, some of the recent Bioscience performance that we have seen has really been driven by the revenue synergies that we have been able to capture by bringing these two things together, device and content.

And today, we are moving the next step forward and we are beginning to guide the division's growth by creating platform solutions. Now what is a platform solution? For Millipore, platform solution can be defined as a device. For example, a detection instrument combined with reagent kits and that reagent kits that have to optimize and validate to deliver easy to use and high-quality results to the customer. And that way, we deliver significantly more value for customers when they purchase a device for just reagents. The acquisition of Guava Technologies we just announced this week is a great example of how we are executing this strategy.

So next I would like to talk about the Guava acquisition. Let me start with a high-level summary of the transaction. We will pay $22.6 million to acquire Guava, which reported $21.9 million of sales in 2008. We expect the transaction to be slightly accretive to our 2009 non-GAAP EPS. Early in 2008, we acquired the right to sell Guava instruments in certain international markets and also to the academic and government accounts in the United States. We launched our first product with Guava in July and we have been very active in developing the reagent kits to be used with the flow cytometers since this fall. Based on the great success experienced since the launch, we decided to acquire that company to gain full promotional access to the markets and to accelerate strategic investments in R&D and sales and also in marketing. We expect to maintain Guava’s operations from Hayward, California.

On the next slide, I show some of the key needs in the marketplace that we are addressing with our flow cytometry platform. By acquiring Guava’s benchtop flow cytometers, we will now be able to bring together instrumentation, reagent kits, validated protocols and technical support to fundamentally improve the customer's workflow in cell biology. Our strategy is to bring the power of flow cytometry to the bench tops of every cell biologist by providing easy-to-use systems that is really available now at a fraction of the cost flow cytometers used in core laboratories where technically flow cytometry is done. That in turn will allow scientists to conduct cell analysis at the bench rather than running routine assays at the core laboratory. So we are expanding the market here. Additionally, we will continue to develop fully validated reagent kits for key areas such as stem cell research, cancer biology, cell health, biomarket discovery to ensure scientists who will no longer need to source reagent, they can develop their own assay again, which saves some valuable time and money. We expect to invest a significant amount of our own R&D and execute strategic acquisitions to bring additional platform solutions such as Guava to the market in the future.

I would like to close the discussion of the Bioscience division by pointing out that this has really been a consistent performer for Millipore over the past four years, which you can see on the slide. We have significantly increased the product breadth and the capabilities of the division, while almost doubling the revenues. More importantly, with average 7% organic revenue growth during this period which is above market. We also are far better positioned today and we are serving faster growing markets with greater opportunities for growth than we had in the past, and these are very solid results, and I'm very excited about the future of the division.

Let's move to the bioprocess division. Excluding changes in foreign currency, the division's revenue declined 2% in Q4 and declined 4% for the year 2008. After declining about 70% organically in the first six months, the division’s revenues were flat in the back half or more or less flat back up in the year, and we saw better revenue dynamics at some of our large customers. No doubt, 2008 was a tough year, but I'm pleased to finally be able to say I believe the inventory adjustments by large biotechnology customers are behind us and the division will resume growth in 2009. But our upstream bioprocessing and downstream bioprocessing business units, they both struggled during the year due to the inventory corrections on our large biotech customers, we generated solid growth from our process monitoring business unit during 2008.

Particularly, our NovaSeptum sterile sampling system grew more than 20% from an acquisition we made in ’05, and it is rapidly becoming the industry standard for sterile sampling. And a key highlight of 2008 was the strong performance of our disposable solution, which we call a product line that was Mobius, Mobius disposable solution. These products are some of the fastest-growing offerings in the Millipore portfolio. We are excited about the new Mobius solutions that we will be introducing at the Endoflex [ph] Conference in March. I hope some of you can attend that conference.

So, despite the disappointing revenue performance on bioprocess, I feel good about the progress the division has made in executing its strategy and strengthening its competitive position. And I would point to several key accomplishments during the year. The accelerating market adoption of new products, for example Viresolve Pro. We are integrating our expanded capabilities to bring new solutions to the market, particularly in disposable manufacturing. We are winning and gaining market share for strategic molecules in the clinical development pipeline. Our win rate has particularly been strong for molecules, and our customers are planning to manufacture in Asia. And a key reason we are winning in Asia is our global footprint and our unique ability to deploy highly skilled technical resources to customers in the region. And finally we are expanding our presence in new emerging market segments such as vaccines. All of this makes me confident about the future of the division.

From the market perspective, we continued to see the fundamentals of the biotech market to grow actually stronger. Biotechnology is becoming a larger percentage of the overall pharmaceutical market. Pharmaceutical companies are shifting more of the investment and M&A into biotechnology. The emergence of generic biologics or also called biosimilars could potentially expand our addressable market significantly. The growth of monoclonal antibodies that are commercially on the market today continues to be very healthy, and health of the biotech pipeline is actually improving. While there were only 22 approvals for significant biologicals issued by the FDA during 2008, which includes new monoclonal antibodies, the new recombinant drugs, but also new indications for the existing molecules and also vaccines. So that's why we saw in 2008, 22 approvals. And when you look now at ’09, beginning in FY ’09, there is a backlog of potential biotech drugs that could enter the marketplace this year. And as of today, there are 37 new drugs indications and vaccines that have been filed with the FDA. So that's a good increase.

It's difficult to predict how many of these will receive approval from the FDA, but what I can tell you is that 2009 is shaping up to be much stronger than 2008. And if the high number of approvals lead to increased manufacturing campaigns of biologic drugs, that would be good for bioprocess business.

Our bioprocess division has an attractive future, and while we have experienced these short-term downturns, the long term potential has not changed and remains very promising. At this point, I cannot predict precisely when we will see the positive impacts from these market dynamics. But I can tell you that we are very well positioned to benefit from these fundamental trends.

So, I know a lot of you might wonder now, what does it all mean for 2009, and what visibility do we have into the performance of the bioprocess division in 2009. But I can tell you that right now into February of 2009, we are starting with a much better order rate for bioprocess. Additionally, some of our large customers are returning to a more normal purchasing patterns. These are two positive data points; however, we are coming out of a downturn in bioprocess, and we are now facing, like many other businesses, period of more uncertainty due to yet to be seen impact of the economic recession in all business. But regardless of this potential downside risk, we still believe you may be able to manage (inaudible) growth in 2009. Before I turn over to Charlie who will talk in more detail about the financials, I want to leave you with a few closing thoughts.

2008 was a year in which we effectively managed in a lower growth environment to deliver exceptional cash flow and solid earnings performance. $193 million in free cash flow and 7% growth in non-GAAP EPS on 1% organic revenue growth underscores how solid and attractive our business model is. While we recognize that we missed our 2008 guidance for organic revenue growth, we still manage to deliver original non-GAAP EPS guidance for the fourth straight year, which I show on this slide. Despite the fact that we have faced many obstacles over the past four years, we have never missed our EPS forecasted guidance since I became CEO. This is important because it reflects both core philosophy as a management team and our execution over time. When things don't go as planned it's incumbent on the management team to both balanced investing in the business with delivering on the earnings and cash flow commitments we have made to our investment. As an investor, you should be confident in Millipore’s ability to manage the business for a long term value creation, still delivering on the short term profitability currently established.

And with that I will turn it over to Charlie.

Charlie Wagner

Thanks, Martin. I will now provide some additional details on Q4 and full-year 2008 financial performance. And I'll begin with a discussion of our GAAP performance in the quarter. Revenues declined 2% from the fourth quarter last year with changes in foreign exchange rates negatively impacting reported results by about 4 percentage points. Our GAAP operating margin decreased to 11.7% from 16.9% in Q4 2007, and earnings per share were $0.60, compared to $0.81 in Q4 2007. The decrease in EPS is primarily due to a lower gross margin as a result of higher costs from the second phase of the global supply chain program we announced last quarter.

These expenses adversely affected our gross margin by approximately 70 basis points during the quarter, and we also wrote down the value of a fixed asset by $6 million based on a current assessment of the property’s expected realizable value.

Martin already provided a divisional view of our revenue dynamics, so I'll add some color from a geographic perspective.

Excluding the effects of foreign currency translation, revenues in the Americas declined by 1% compared to the fourth quarter last year. Europe increased 3% and Asia-Pacific revenues grew 7% in Q4 2008. Of particular note this quarter was the performance of a bioscience division in Europe, which generated double-digit growth in the region. Our bioprocess division’s revenues remained somewhat soft in Europe during in Q4, but we did not experience any sequential weakness from what we reported last quarter.

On the next slide show up our Q4 2008 non-GAAP operating results, and I'd encourage you to review the non-GAAP reconciliation table in the press release for the detail of our adjustments. Our Q4 2008 non-GAAP gross margin of 54% decreased 80 basis points on a year-over-year basis due primarily to impact of changes in currency. Q4 of last year also benefited from $5 million of UCO [ph] license revenue that was recorded at a very high margin.

Non-GAAP SG&A expenses represented 28.5% of sales compared to 26.9% in Q4 2007, an increase of 160 basis points, primarily due to higher employee costs and higher FAS 123 expense. Non-GAAP R&D spending represented approximately 6.5% of sales which is down 20 basis points from 6.7% in the fourth quarter of 2007.

Our non-GAAP operating margin of 19% decreased 230 basis points over last year's fourth quarter. Our non-GAAP tax rate in Q4 was approximately 15% and our net interest expense was of $13 million, approximately $3.4 million lower than last year, due to low average debt balances. The lower Q4 tax rate resulted from the renewal of US R&D tax credit and a true up of our full-year tax rate, which reflects proportionately lower levels of profitability, in high tax jurisdictions like the US. All of these items led to non-GAAP EPS of $0.95 in the quarter, a decrease of 3% over Q4 2007.

On the next slide I show our GAAP results for the full year 2008. The increased revenues by 5% with 4% of the growth coming from changes in foreign currency translation. The improvement in GAAP profitability is primarily due to higher gross margins as a result of costs related to our acquisition and integration of Serologicals they were recognized in 2007, they did not repeat in 2008.

Turning to revenues; for the full year, excluding the effects of foreign currency translation revenues from the Americas declined by 5%, primarily due to the weakness in bioprocess. This was offset by 4% growth in Europe and 6% growth in Asia Pacific. Our business in China continues to generate very good growth and is quickly becoming a large portion of our total Asia business. Our bioscience division generated very strong growth in Asia, growing just shy of double-digits for the year, and this is quite strong when you recall that our total Asia growth includes the impact of Japan, which grows at a slower rate than the rest of our business in Asia.

On the next slide, I show our full-year 2008 non-GAAP results. Our non-GAAP gross margin decline 40 basis points, with favorable product mix being more than offset by the adverse impact of currency during 2008. Our non-GAAP SG&A expense during the year was 28.7% and non-GAAP R&D was 6.4% of sales; the higher SG&A was mostly driven by higher employee separation costs and higher FAS 123 cost during the year. The low R&D in 2008 was partially the result of an increase in R&D credits or incentives we received during the year. The lower gross margins and higher operating expenses resulted in a non-GAAP operating margins decreasing 50 basis points to 19.8% of sales. However, the increase in our FAS 123 expense alone represents a 50 basis points difference year over year.

Lower in interest expense and a favorable tax rate contributed to 2008 non-GAAP earnings per share growth of 7%. Our lower interest expense was due to low average debt balances resulting from our significant efforts to pay down debt throughout the year. And similar to Q4, the lower tax rate is due to a lower percentage of profits in higher tax jurisdictions.

On this slide, I showed a significant improvement we have generated in our profitability over the past four years. In early 2005, we’ve made a commitment to investors that we would increase the overall profitability of the company and we are delivering on that commitment. Excluding FAS 123(NYSE:R) expense over the past four years new, non-GAAP EPS by a compound annual growth rate of 15%. This is a clear improvement from our performance in the previous four years. This increase in profitability came from moving more of our portfolio into higher margin consumable products, increasing the efficiency of our global supply chain, and generating strong operating leverage at the SG&A line.

The volatility of currency markets has been a hot topic for many people during 2008. And one of the advantages that Millipore offers investors is that our revenues and costs are geographically well balanced, which reduces the overall impact that changes in foreign currency have on our financial statements. While changes in foreign currency added 4 percentage points to our top line performance during 2008, this was partially offset by lower gross margins and higher SG&A costs. The net result of changes in foreign exchange rates was a positive impact to our earnings per share in 2008 of only $0.04 on a year-over-year basis. So although foreign exchange rates may reduce our reported growth rate in 2009, we don't expect a significant negative effect on our bottom line from changes in foreign exchange rates because of our balanced global perspective.

Cash flow from operations during the fourth quarter was approximately $81 million, and factoring in capital spending of $24 million during the quarter, we generated approximately $57 million in free cash flow. We increased our cash balances during the quarter by approximately $92 million. To be more conservative and provide better short-term liquidity, our net debt at the end of 2008 was approximately $1 billion, a year over year improvement of approximately $211 million. Over the past three years we significantly reduced the leverage of the company, we decreased our debt to total capitalization ratio from approximately 60% in 2006 to 47% today, and our strong focus on debt pay down has put us in a much better position to really bolt-on acquisitions such as the recently announced Quaba [ph] transaction. Lower debt levels have also been a key driver of our earnings performance as we significantly decreased our interest expense during this period.

Moving on the working capital; at the end of the fourth quarter. Net accounts receivable were $275 million, down from $292 million at the end of 2007. Day sales outstanding were 66 days at the end of 2008 compared to 67 days at the end of 2007, slight improvement. Although we had an excellent quarter of collections this quarter and receivables were a source of cash in the fourth quarter, it's a positive sign as to, at least the current health of our customers and our markets.

Inventory at the end of the fourth quarter was $259 million, a reduction of $18 million from last year, with most of this reduction coming from changes in foreign currency translation, because the year was 129 days of supply, which was down from 138 days at the end of 2007. Our significant improvement in operating income was the primary driver of this strong free cash flow performance during 2008. On this slide, I show our free cash flow performance over the past five years. During 2008, we generated $193 million in free cash flow, which represented a 60% increase over 2007. Another driver of the percentage increase in our 2008 free cash flow was a $25 million reduction in the rate of our capital spending as we increased total rates for capital projects. We also benefited from solid receivables collections in Q4. If you take a look over long appear of time, we generated a 17% compound annual growth rate in our free cash flow since 2004, and this reflects the ability of our business model to generate attractive levels of cash flow.

Now let me turn to our 2009 guidance. As you can imagine, as we are entering 2009 with a major factors impacting our markets and our business. Obviously the economy continues to struggle and a number of pharmaceutical companies have recently announced plans to reduce headcount. While we are cognizant of the risks posed by the current economic environment, we expect the strong fundamentals of our market, our high percentage of consumable revenues, and our geographic and divisional balance will allow us to generate solid results in the coming year. While there is downside risks in the current environment, we are not without update opportunities as well. From a visibility perspective, we have the greatest visibility through the first six months of the year. But the fact that most of our revenues are derived from consumable products, and very little of our revenue is derived from capital spending or industrial markets provides us a degree of confidence in our outlook.

For 2009, we expect reported revenue growth will be between a 1% decline and 1% positive growth, which includes the impact of Guava acquisition. Based on today's exchange rates, we believe that we will report a 4% unfavorable impact from changes in foreign currency. So excluding the impact of currency, we expect to generate organic revenue growth between 2% and 4% in 2009. We expect to generate non-GAAP earnings per share of approximately $3.70 to $3.85 per share. This EPS estimate is based on the projected non-GAAP tax rate of 25% to 27%.

One thing to note, when we apply the new accounting requirements of the FASB staff position relating to our $565 million of convertible debt outstanding, we will report approximately $15 million in additional non-cash interest expense in 2009. The accounting change is being made to more accurately reflect the debt and equity components of convertible instruments. We will exclude this expense from non-GAAP earnings per share in 2009, and we will report the charge in our GAAP to non-GAAP reconciliation. So, just to be perfectly clear, our non-GAAP EPS guidance of $3.70 to $3.85 does not include the impact from this $15 million non-cash expense due to the change in accounting rules.

In may 2009, when we report our Q1 numbers we will provide restated GAAP earnings for the past three years to reflect the charges associated with this change in accounting. We expect to exceed $210 million in free cash flow during 2009 with capital expenditures being in the range of 2008 levels. As a reminder, we define free cash flow as cash flow from operations less capital expenditures.

So to quickly summarize, the key takeaways from the fourth quarter and full year 2008, we generated solid growth in non-GAAP earnings per share during a challenging period, we are executing our objectives to drive free cash flow and pay down our debt, and we are continuing to invest in the business including executing strategic acquisitions and external R&D programs that will drive our growth in the future. We made progress in several key initiatives, such as product innovation, and we know that we are entering 2009 as a stronger company.

With that, let me turn the call over to Joshua to begin the Q&A session.

Joshua Young

Thank you and please assemble the Q&A roster.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Jon Wood with Banc of America Securities. Please go ahead with your question.

Jon Wood – Banc of America Securities

Hi, thanks a lot. Martin, did you say, did you give the Guava revenue number, I'm sorry if I missed that.

Martin Madaus

Last year’s revenue number was $21.9 million.

Jon Wood – Banc of America Securities

$22 million – and how much of that went through use, so basically incrementally, what is it adding incrementally to the top line?

Martin Madaus

You have that Charlie?

Charlie Wagner

Yes, we are not going to break that out Jon. But in the guidance we've given, the assumption is for the acquisition will add about 1 percentage point for the growth rate.

Jon Wood – Banc of America Securities

Okay. And then Martin, can you discuss just a higher level perspective on what you view as the addressable market for the benchtop flow? And also comment on which end markets our customer groups are most suited for, for this type of instrument?

Martin Madaus

Yes. We target currently the research market, and the research market is divided into the private and public, and academically funded research institutions around the world. And what we bring with this acquisition, we can also go off pharma and biotech and the Guava instrument is mainly used in research applications. It can also be used in the bioprocessing market to help with characterization and it's used, I understand, by a few customers. And then there's a very small market outside of the US where the product is used for HIV testing in CD4, so that's a diagnostic application. Our goal is to focus very much on the research applications first; second, and explore other applications in our core markets such as in bioprocess. But we will not be focusing on the diagnostic application. And I would say the main benefit, which I highlighted this that you can basically do your own (inaudible) experiment in your own lab, because it isn't expense and it is easy to use. So we think we will grow the market substantially.

Jon Wood – Banc of America Securities

Okay. Great, then one last one. On the cash flow Charlie, it looks like the free cash flow guidance is about up in line with net income. So, is it fair to assume that there is no incremental working capital benefits built into the cash flow guidance as it stands?

Charlie Wagner

Hey John, there is a little bit of improvement there obviously on the income, we've given a range on EPS. So you can work your way into some improvement on working capital. Okay, and on inventory, is that the primary source there at 129 days and can you give us a sense of the opportunity in that working capital account?

Charlie Wagner

Yes, absolutely inventory is the key focus. As I mentioned during the call, we had a really strong fourth quarter in receivables this year. And – you know so the hope is that that is a level of performance we are going to be able to sustain going forward. Obviously, who knows what the economic environment brings in 2008. Hopefully, we don't lose ground there but the internal team has done a fabulous job there and we would like to see that continue.

On the inventory side, we have started to put programs in place to drive inventory levels down. As you know, we have been consolidating our supply chain for the last few years and that always creates a challenge for us inventory wise as we close facilities. We need to build high levels of safety stock in inventory, while we transfer the operations elsewhere and so we do have some of that impacting the 2008 numbers and continuing into 2009. Aside from what I would call those strategic bills, we are driving the kind of been more normal run rate downward and we will definitely see improvement in inventory level days and dollars in 2009.

Jon Wood – Banc of America Securities

Okay, thanks a lot.

Operator

Our next question comes from the line of Tycho Peterson with JPMorgan. Please go ahead with your question.

Abigail Darby – JPMorgan

Hi, this is actually Abigail Darby sitting in for Tycho today. In terms of the proposed MAH funding in the stimulus bill, could you elaborate on what you see as the potential benefits for Millipore are there? And then in terms of timing if you would factor that into your guidance for 2009?

Martin Madaus

Well, first of all, this bill is not approved and this bill has to be approved by the government first. After it is approved, it has to go to the agencies and be divided up. But if you look at the amount and if this amount is going to be approved it will help in the research markets quite a bit because we have great exposure to the academic markets. But to make a statement on when this will be spent and how this will impact our revenues is purely speculative. We have not factored this in into our guidance for 2009.

Operator

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

Derik De Bruin – UBS

Hi, good afternoon. Looking back on – I am searching my memory – you know, during the last time there was an economic downturn in like 2002 to 2003 timeframe, your fruit and beverage business got a little bit of a hit and also you know, whenever there was the Sanofi-Aventis merger, your traditional pharmaceutical processing business took a little bit of a hit as in facilities that were consolidated. Could you just walk us through kind of those businesses and I guess you know, what is your exposure to Pfizer and Wyeth?

Martin Madaus

Yes, we in fact, on the bioprocessing side, this part of the business has not changed a lot. It is not a very dynamic business, but it is a good profitable business and we haven't seen any major change here on that side and also we haven't changed – we haven't seen any major change in food and beverage. But again, this is relatively small compared to the other businesses now. So it is just not going to help us to grow much, but it is also not going to drag us down overall.

On the merger question, yes, there has been – I think the last four months there has been a lot of merger announcements, lot of activity on the customer side. I think it remains to be seen if there are headcount reductions and the headcount reductions there were we calculated in aggregate about 5% of the workforce, which is I would say modest and if some of that means research labs are being closed, that could depress the growth in research a little bit. On the production side, it really doesn't impact us that much because the key here is that the drugs and the reason why these companies are in business and grow and these drugs are being produced. So I don't think a merger will have much impact here on us. And in fact, it could be positive because what these companies are doing, they are looking at large strategic suppliers to do more and that plays a little bit into our strength on the bioprocess side. But what shall we say, how much research spending is there, how much of the research spending going to be curtailed in those pharma mergers.

Derik De Bruin – UBS

Right, I would put you more along the lines of a comment that Pfizer was talking about closing five manufacturing facilities and I just was wondering – I know you are not as exposed.

Martin Madaus

Yes, that has very little impact.

Derik De Bruin – UBS

And I guess, could you just kind of walk us through what you are looking for in terms of your – how does your SG&A and R&D spend, do we do basically flattish levels for both of those or there additional costs that will come out of those?

Martin Madaus

SG&A should grow lower than sales, so there is always some leverage that we are building in and R&D will grow a little bit faster than sales given the total. Given that the SG&A is much larger obviously, there is still a leverage on the –.

Charlie Wagner

Derik, and also we have a – we still have a step up in FAS123 this year but it is much less than the step up we saw in 2008. It is about half as much as we saw in the step up; so, that helps going into the new year.

Derik De Bruin – UBS

Okay, and what is your total FAS123 expense then? What was it in 2008 in what is it in 2009?

Charlie Wagner

Say 23 going to 27.

Derik De Bruin – UBS

All right, thanks. I will get back in the queue.

Operator

(Operator instructions) Our next question comes from the line of Ross Muken with Deutsche Bank. Please go ahead with your question.

Ross Muken – Deutsche Bank

Good afternoon. You know you talked about the increase in new molecules filed in 2009 over 2008, but you didn't talk about an opportunity that pharma and some of the generics have been making a lot of noise about more recently and that is biosimilars. And there were pretty big dollar figures thrown around by some of those players in terms of the investment that they are looking to put in and obviously I would assume that a lot of that is going to go into building out manufacturing capacity. Can you talk a bit about how you saw to gauge that opportunity and your sort of exposure there and sort of from a timing perspective, if you have any thoughts on if we do get some pathway created in the next 12 to 24 months; from that time on, when we start to see kind of manufacturing facilities actually being put up?

Martin Madaus

That was a good point, Ross. I was focusing my comments more on 2009 and in 2009 we see much more interest in it but not really concrete plans to really build markets and scale them up. That could happen in the next three years. I would say and obviously, the regulatory environment at least in the US remains murky I would say Europe is much more progressive there. But it is a – one of these longer-term trend and longer-term means two to five years that will definitely grow the market. What we see today is more interest, more contact looking at adopting our technologies to make these biosimilars in the most effective but also high-quality ways. The timing is a bit hard to predict, but it has started I would say, but it is just at a low level.

Ross Muken – Deutsche Bank

And you know there was some noise made today in the Congress, there was a proposal put forth that would push for more embryonic stem cell research and clearly you have heard the President talk about that as well. Can you talk a bit about sort of what is in the Serologicals, the Bioscience toolkit to sort of address that end market and kind of how you guys are positioned relative to that?

Martin Madaus

Yes, we are one of the companies that has a significant number of products that can be used for stem cell research and we have through two partnerships, one on the West Coast one on the East Coast with Academia, we continue to license their new products. So we have tools, we have media, we have reagent kits, for example in Guava we have stem cell kits that can be used for stem cell research and we're looking very actively to do more in this field. The environment will be much better. I think there is somewhat of a backlog, so once research funds can be applied to stem cell research, you will see a very healthy growth. And that could happen this year. So this is one of the potential upsides we see in the Obama bill or in this stimulus bill. If some of that money goes in there and some of these restrictions are being removed this year, this could be an upside for 2009, which is nice in a year like 2009.

Ross Muken – Deutsche Bank

And then one other quick question, Charlie. As we think about kind of the gross margin line, I mean, excluding kind of the impact from foreign currency, because that is going to be a bit harder to predict, but in terms of – what level of organic growth do you need to sort of have to get the volume pull-through needed to show expansion on that line. Is there kind of a breakpoint that you could point to?

Charlie Wagner

You know something in the 3% to 5% range is certainly helpful, though I would say remember a meaningful chunk of our gross margin improvement over the last few years has had a lot to do with mix and not necessarily just volume, because we have brought higher value products into the portfolio, as we have launched higher value products in Lab Water, in virus removal, those differentiated products command a premium and that helps the mix certainly. So there is a mix component, but if you're just talking about pure volume leverage, you are probably talking something in the 3% to 5% range.

Ross Muken – Deutsche Bank

Okay. Great. Thank you very much.

Operator

Our next question comes from the line of Dan Leonard with First Analysis.

Dan Leonard – First Analysis

Good evening. Charlie, a question for you. Would you be able to break out your sales forecast between Bioprocess and Bioscience organically?

Charlie Wagner

No, we are not doing that, Dan. I think that we will probably see slightly higher growth in Bioscience than in Bioprocess but that is really the only color we are going to give on the guidance.

Dan Leonard – First Analysis

Okay, and you're expecting Bioprocess to grow as the difference between those two –

Charlie Wagner

Yes, Bioprocess, we expect to grow.

Dan Leonard – First Analysis

Okay, I guess my other question on the Guava acquisition. Do you see that as having an overlap with what you're doing with Luminax or is it complementary?

Martin Madaus

No, it is separate and complementary in a way that we can use similar sales force and similar service organization, but in terms of the applications, they are actually quite different and they are actually done by different groups.

Dan Leonard – First Analysis

Okay, thank you.

Operator

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

Jodi Dai – Leerink Swann

Hi, this is Jodi Dai dialing for Isaac. Thanks for taking our question. So our first question is on the Bioscience side. We wonder what visibility you have into company R&D spending patterns in 2009.

Martin Madaus

Yes, that is one of the things that has – I would say used to be fairly good and has become a little bit more uncertain. While we have good visibilities in our outsourced business, where we have longer-term agreements and contracts, so that hasn't changed; in fact, there is very strong demand for outsourcing services. When it comes to our instrument pipeline and the demand for those instruments by pharma companies, that looks fairly good. But when you look at the second half of 2009, who knows? I mean there are a lot of changes being made today. We have tried to factor this in our guidance by being, compared to the past, a little more cautious on our revenue growth so we see some impact, but we are not seeing a total change. And again we focus on segments of that research market in pharma, where we think funding will be still good.

Jodi Dai – Leerink Swann

Okay, thank you. And also we heard that your competitors in Bioscience saw weakness in those (inaudible) companies in the past quarter. Did you see slower spending in those groups or was there one group weaker?

Martin Madaus

No, we didn't see that and it is always – you know, every company, even if it is a direct competitor, they have slightly different focus and product portfolios. So as I said, we had a really good finish in Bioscience in Q4. So we didn't see that really.

Charlie Wagner

And Jodi, the only other thing I would point out is – you think about our Bioscience business, the average order value in that business is slightly over $1,000. So it is fundamentally different than some of the peers in the sector.

Jodi Dai – Leerink Swann

And lastly, in Bioscience, are any of your customers in the drug industry more than 3% of your sales?

Martin Madaus

I don't think so.

Charlie Wagner

No, if you look at the 300,000 customers we have, most of those are Bioscience customers.

Jodi Dai – Leerink Swann

Okay, all right. Thanks.

Operator

Our next question comes from the line of Paul Li with Brown Advisory.

Paul Li – Brown Advisory

Hi, Martin, I have a question on – if I look at your guidance for 2009 organic, it seems to imply there is some sort of deterioration from the past Q4 from but from your statements, you're talking about Bioprocess is going to recover somewhat in 2009 and Bioscience will have some benefits from Guava acquisition and some new product introductions. How can you reconcile your qualitative characterization and your quantitative guidance?

Martin Madaus

Yes, I think you picked up a good point. I mean clearly, what the forecast and again we have spent a lot of time on analyzing the trends is on the one side reflective of what we can do in 2009; on the other hand, we have some upside opportunities and we have some downside opportunities. So we ended up in the middle. It is very difficult today to really forecast correctly and we want to be right in the middle. It could be better but we gave you a range basically. Many of the things that have to occur in 2009 have to materialize both on the upside and on the downside. So I know it is difficult to predict and that is not very easy to really forecast at this point for you and me but we just have more uncertainty and that is reflected in our guidance.

Charlie Wagner

It is also difficult to compare a quarter to a year. We reported 2% organic growth in the fourth quarter and implied in that guidance is 2% to 4% for the year. So clearly there is an improvement, if you're making that comparison.

Paul Li – Brown Advisory

All right, thanks.

Operator

That is all the allotted time we have for questions. I would now like to turn the call over to Martin Madaus for closing remarks.

Martin Madaus

Well, thanks for joining us this evening. 2008 was a year in which our Bioscience division delivered while we executed on our objectives to improving our cash flow and repaying our debt. While we expect 2009 presents us with a number of challenges, we still believe that we will be able to overcome these obstacles and generate really good revenue, earnings, and cash flow growth in the year. We hope to see some of you or all of you at our upcoming presentations.

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Source: Millipore Corporation Q4 2008 Earnings Call Transcript

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