Sigma-Aldrich Q4 2008 Earnings Call Transcript

Sigma-Aldrich Corporation (SIAL)

Q4 2008 Earnings Call

February 11, 2009 11:00 AM ET

Executives

Kirk Richter - Treasurer

Jai Nagarkatti - President and Chief Executive Officer

Rakesh Sachdev - Chief Financial Officer

Analysts

Quintin Lai - R.W. Baird

John Roberts - Buckingham Research

Isaac Ro - Leerink Swann & Company

Dmitry Silversteyn - Longbow Research

Douglas Judy - KeyBanc

Oliver A. Marti - Columbus Circle Investors

Dan Leonard - First Analysis

Jon Wood - Bank of America

Presentation

Operator

Good morning, my name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the Sigma-Aldrich Fourth Quarter 2008 Results 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).

I will now turn the call over to the Mr. Kirk Richter, Treasurer and Investor Relations contact. Please go ahead, sir.

Kirk Richter

Thank you. And let me also say good morning and welcome you to our fourth quarter earnings conference call. With me today are Jai Nagarkatti, our CEO and President; and Rakesh Sachdev, our CFO.

After my introductory comments, Jai will review our 2008 accomplishments and our 2009 initiatives. Rakesh will follow that with some details on our fourth quarter performance and then comment on our full year 2009 outlook. After completing this review we will open up the call for your question and comments.

We will be using a slide presentation as part of today's call. That presentation can be viewed by accessing our Investor Relations website.

Before we began these reviews, I do need to remind you that today's comments will include forward-looking statements of our future activities and our expectations for sales, earnings, cash flow and other possible future results. While we believe these expectations are based on reasonable assumptions, actual results may differ materially due to any number of factors, including the risk factors listed in our annual report on Form 10-K for the year ended December 31, 2007 and in the cautionary statement in today's release and in our slides.

We have no plans to update these forward-looking statements after this conference. Also, SEC regulations require us to provide information on any non-GAAP financial measures covered in today's conference. That information, which consists of currency and acquisition adjusted sales growth and profit and EPS results on both the pro forma and reported basis and free cash flow is also contained in today's earnings release, which is posted on our website.

Now I'll ask Jai to begin our review. Jai?

Jai Nagarkatti

Thank you, Kirk and good morning everyone. Before I begin my comments, let me say that I am pleased to have Rakesh Sachdev joining us for the first of what I believe should be many quarterly conference calls. He is a talented executive and brings a unique combination of financial, operational and global experience to the Sigma-Aldrich team. He will be completing his third month with us shortly and is already a key contributor in helping us manage and set direction for the company.

Now let's take a look at our performance and recap some of our many accomplishments in 2008. Our results again set a record for sales and earnings in 2008. After crossing the $2 billion level in sales one year ago we have now driven annual sales to over $2.2 billion.

In a difficult global environment we reported sales growth for the full year of 8% with an organic growth of 5%. And our earnings also hit a new high with reported diluted earnings per share of $2.65, representing a 13% increase over 2007.

As I look back on 2008 I can say that the first six months of 2008 performed about as expected, enabling us to deliver organic sales growth pretty much inline with our 7% organic growth. The second half was a different story, as the global economies quickly changed and were less than robust. But as we have indicated previously, we tend to be somewhat recession resistant.

So, overall in spite of the less than robust economic climate in the later part of the year I am very pleased with our overall 2008 performance. And I want to thank my 7,900 colleagues around the world for their efforts in achieving these results. Those of you who have followed us know our track record of consistently delivering superior performance and shareholder returns.

For the last five years; we have reported compound annual sales growth of 11%, with currency adjusted growth of 12%, which exceeds our organic sales growth goal of 10%. And our returns to share holders as measured by both diluted earnings per share and cash dividends have grown even faster, with compound increases of 15% and 16% respectively.

Before I ask Rakesh to provide more details on our 2008 performance, I would like to mention just a few highlights for 2008 that go beyond the numbers. You will recall that we launched new strategic initiatives at the beginning of 2006 that have driven sales growth at above market rates.

This plan had five key initiatives, and last year we continued to build on all five of these initiatives. The first initiative was to be an even more customer success driven organization. We have done that, increasing our recognition as a major player in both, the life science and high technology markets.

Innovative new products have been added. We have worked with customers to deliver those products cost effectively and we have also been able to support customers' need for more technical information and customized solutions.

In 2008, including the fourth quarter, we saw mid-single to double-digit organic growth in the analytical, molecular biology, hi-tech, biochemistry, cell signaling and some other products which collectively represent about 80% of our total sales. This sales increase was offset by a decline in our business, primarily servicing the large pharmaceutical companies.

Most of this decline is largely related to small molecule organic products. Over the long-term as large pharma shifts its focus from small molecule drugs to large molecules, we believe we are well positioned to take advantage of this shift with our broad portfolio of biotech and biochemistry products and differentiating capabilities in this area. And we are continuing to add to this portfolio of products and capabilities.

Let me give you a few specific examples. Within our research biotech business unit, our antibody offering has tripled in just one year, as we significantly increased antibody contents by adding over 8,000 new antibody just last year alone.

In addition, we launched... the launch of our CompoZr zinc finger nuclease program, our nuclease program which enables researches to edit any gene in a living cell is gaining rapid adoption and attention. In fact this program was recognized by the Scientist Magazine as one of the top ten innovations of 2008.

On our second initiative; of expanding in faster growth markets, sales in CAPLA markets are now at 22% of total sales and on their way to reaching our goal of 25% into this region by the end of 2010.

Sales in our target markets of India, China and Brazil collectively grew at a double-digit rate in 2008. A new approach to sales and marketing in Japan enabled us to realize mid-single-digit organic growth in a flat market.

And to help us reach our 25% goal, we have now established presence in Vietnam and plan to open an office in Chile in the current quarter. On the third initiative to expand our internet and e-commerce capabilities, our efforts drove sales to these channels to 42% of total research sales last year. We added many new capabilities to our website last year, such as an enhancement to our search engine, call your favorite gene. We also revamped our website to enhance usability and performance, including improved visibility to search engines like Google.

Last, but not the least, we did more B-to-B hook ups last year to make it convenient for our customers to interact with us. In October of 2008 we hit a new record for monthly activity on our website with over 3 million visits.

The fourth improvement... initiative or process improvement continues to be key to our ability to produce superior operating margins. We have now realized over 15 million in annual savings in each of the last three years, reinvesting much of this in our other growth initiatives.

And our global supply chain initiative is well underway and expected to provide in excess of 15 million pre-tax benefits in 2009.

Finally, in the technology acquisition arena, we have stepped up our activity with the addition of 70 new licenses in 2008, primarily for our Research Biotech business in the faster growing analytical and testing area and in hi-tech applications. We now have well over 600 licenses.

Now let's turn to our efforts in 2009. While overall demand for our products remained healthy in the fourth quarter, the growing uncertainty due to the economic downturn makes it more difficult to forecast sales and earnings.

And that's complicated even more by the headwind from worldwide currency exchange rates we will be facing in 2009. That said we have developed contingency plans to mitigate some of this uncertainty in 2009 and Rakesh will provide you with our outlook a little bit later.

Let me assure you that we remain committed and fully expect to continue our focus on achieving our long-term growth objective of double-digit organic growth. As I have mentioned before, the pursuit to improve the quality of life through research and through products such as new drugs, green initiatives, faster computers, improved lighting, renewable energy and the like will continue to be done all over the world. And it is this research that should drive our long-term growth and business.

We are moving full speed ahead with new activities that we believe are critical to our short and long-term growth. These initiatives include activities that should enable us to take market share and enhance that with contributions from technology acquisitions.

We are also looking for new opportunities that build on our unrivaled scientific knowledge and our strong knowledge of logistics that manifests itself in a commitment to service, that we believe, leads our markets. That's something that's been a hallmark for us since Sigma and Aldrich combined some 33 years ago.

And it's something that we fully intend to continue exploiting as we seek to build on our record of 33 years of continuous growth in sales and earnings. Sure, the markets are challenging, but we have been challenged before and emerged as a stronger company every time.

The key activities that will drive our growth over the next three years fall into three broad categories; accelerate, elevate and innovate. The essence of this approach will be to accelerate activities that have performed well for us in the past and where there are opportunities for continued growth, and elevate our efforts in those areas where we can do better than what we achieved in the past, and then add innovation to expand and leverage our core competencies.

Our focus on enhancing the customer experience, expanding in faster growing geographic markets, extending e-commerce capabilities, acquiring new technologies and margin enhancement through supply chain initiative will all continue. And we'll add a new dimension to our activities in the innovate (ph) area. Here we plan to capitalize on our broad knowledge of products sourcing and offerings differentiations in the markets with customer directed configurations that include customized solutions.

We'll also seek to take advantage of our unrivalled scientific knowledge, providing support for breakthrough technologies in the life science and high-tech area and facilitating both the general and very highly specific scientific collaborations.

And finally, we look at new venture opportunities in life science and high technology expecting some incremental, though modest contributions to sales later in the year. These activities will help us navigate the uncertain market conditions in 2009 and enable us to deliver organic sales growth and produce diluted earnings per share at or above the 2008 level.

Current economic conditions warrant us to be cautious in giving firm guidance, but let me assure you that we plan to do everything in our control to drive sales and manage cost to achieve these results. I want to thank you for your ongoing interest in our company. It remains financially strong with the broadest product offering, unrivaled scientific knowledge and superior service that make Sigma-Aldrich a leader in its markets.

We are fully committed to deliver superior returns for our employees, ourselves and our investors.

Now, I'll ask Rakesh to provide more details on our 2008 results and 2009 outlook. Rakesh?

Rakesh Sachdev

Thanks, Jai. And a very good morning to everyone. Before I comment on our outlook, let me say how pleased I am to be part Sigma-Aldrich team. The track record that's been achieved here over the last 30 plus years is impressive. But what is even more impressive are the opportunities for Sigma-Aldrich to take this business to a whole new level. It is during times like this that good companies differentiate themselves. And I'm excited to be working with Jai and the management team to collectively do just that. Also, I look forward to the opportunity to meet many of you in the coming months.

As we reported in today's release, fourth quarter sales were $510 million, lower than the same quarter in the previous year by 4% or $22 million. Excluding the impact of currency, sales would have been 3% or $14 million higher. Net income of $84 million in the fourth quarter was lower by $1 million, compared with the fourth quarter of 2007, primarily due to higher SG&A expenses associated with higher insurance costs and impairments of a few of equity investments.

Our earnings per share was $0.68 in the fourth quarter; higher by $0.04 compared to the same period a year ago. This increase was achieved largely through higher organic sales and recent pricing actions. An additional increase from currency and share repurchase was partially offset by the higher SG&A expense.

Our organic growth rate in Q4 did decline from previous quarters, reflecting the challenging market conditions in certain of our end markets. Our three research based units had a currency adjusted sales gain of about 4% in the fourth quarter compared with the fourth quarter of 2007.

As Jai indicated, we had several of our research based products grow between single and double-digit versus the previous year.

Our SAFC organic sales were flat in the fourth quarter relative to the prior year. Where we did a decline was in our sales to large pharma companies, and more recently in sales to the chemical and industrial companies. Geographically, we saw a greater slowing in Europe than in the U.S.

The currency benefit that we enjoyed in the first nine months of the year that have added six percentage points to growth for that period, changed to an unfavorable impact of 6.8% in the fourth quarter with the weakening of the euro and other currencies, relative to the U.S. dollar during the quarter.

Our fourth quarter pre-tax margins and the improvements on the 2011 that we have experienced consistently throughout each of the quarters of 2008 reflects the continued benefit from higher sales, strategic pricing actions, currency, lower interest rates and ongoing process improvement activities. We're particularly pleased with the 220 basis point improvement in gross margin from last year's fourth quarter.

You may well be wondering how we realized a $0.02 earnings per share benefit from currency in the fourth quarter, despite the adverse impact of currencies on sales. That benefit relates to where we make, what we sell and its time in our inventory. With the majority of our manufacturing in the U.S. and roughly a seven month inventory on hand, we continue to realize the benefit from items made earlier in 2008 and held in our international inventories until sold in the fourth quarter.

This advantage which was primarily realized in gross profit margins, more than offset the impact of translating our international sales and profits at fourth quarter, rates that were lower than fourth quarter 2007 level. But that's not likely to continue in the first quarter of 2009.

As I've said earlier, the increase in the SG&A expense level in the fourth quarter of 2008 compared to 2007 reflects high insurance cost and impairments of a few of our equity investments in developing technologies to reflect current market values. We do not expect adjustments like these to reoccur on a routine basis in future quarters.

For the full year of 2008, pre-tax margins were 22.2% of sales, up from 21.5% of sales in 2007, achieving the margin improvement expected in our 2008 performance forecast. As you can see, we generated strong free cash flow of $314 million in 2008. This was slightly lower than 2007, partly because of investments in working capitol to fund current year growth and capital expenditures to fuel future growth.

Going forward, we are going to focus increasingly on three key near-term financial metrics; sales growth, operating income and margin and free cash flow. As Jai has indicated, we are going to accelerate our sales efforts in the life science and the high technology market segments.

In the life science segment, we want to be a leading destination place for researchers to access deep biological information and market leading products to help solve their biological questions.

In the high technology markets, we want to leverage our growing material science capabilities in areas such as nanotechnology and alternative energy.

Regionally, we plan to continue emphasizing our growth in the faster growing markets and capitalize on our e-commerce pipeline. We have a strong balance sheet and we will carefully evaluate strategic growth opportunities as we move forward. We plan to ensure that through our planning and execution that our operating income grows at higher rates than sales. We planned to work on all levels available to us, including strategic pricing actions, global supply chain and procurement initiatives and continuously evaluating and optimizing our product portfolio.

And finally, we intend to set aggressive targets and engage our teams to enhance asset utilization, thereby improving our free cash flow generation.

We expect to achieve this by making improvements to our working capital levels, managing our capital expenditures and through greater tax efficiencies. Over the course of the coming quarters, we will share with you more details about our plans and progress in each of these areas. So stay tuned.

As we and many of our peers have indicated the lack of clarity about global economic recovery makes it more difficult to ascertain near-term demand level in some of our markets. In fact, we do expect that several of our end-markets will contract in 2009. We are seeing more reductions in research staff at some of the pharma businesses. There is uncertainty about the funding of small biotech companies and now there are also workforce reduction at large chemical and electronic manufactures.

In the wake of these headwinds, we still remain encouraged by our new product offerings and initiatives and our ability to penetrate new markets and customers and win share as we look ahead.

If external conditions do not deteriorate much further, we expect to achieve top line organic growth in the low single-digits. Our sales efforts are stronger than they have been before, with a 3% addition to our global sales team.

Our teams have been able to deal with adverse market conditions in the past, so we expect nothing different this time around. And I hope to bring the benefit of my own experience to Sigma-Aldrich in looking for opportunities as we respond to the challenges of the current global economies.

With the weakening of the euro and other major currencies relative to the U.S. dollar, the tailwind that benefited us in 2008 will likely be a headwind throughout 2009. The negative impact of currency on earnings per share is expected to be about $0.30 in 2009; if exchange rates remained at current levels.

We have anticipated this and plan to offset this impact by achieving savings through our global supply-chain and procurement initiative, strategic pricing actions and other company wide cost containment actions including and a modest contribution to earnings per share from our recent and ongoing share repurchase activity.

We expect our operating margins to be at or slightly above our 2008 levels. Our effective tax-rate is expected to increase slightly from 2008, 30.2% to a range of 31 to 32% for 2009. With the increase due to a reduction in our net international tax benefits and an increased in some tax contingency.

Considering all of these factors, we expect our diluted earnings per share for 2009 to be at or slightly above our reported 2008 figure. While there are number of factors that could influence where we land exactly, it is difficult at this time to be anymore specific than that.

Our cash flow continues be a strength. We expect to again realize more than $300 million in free cash flow in 2009, after funding our capital requirements, that are expected to be about a $110 million. At the increased quarterly rate of $0.0145, our 2009 dividend will require about $70 million in cash. We have not encountered any significant change in our ability to place short-term debt in the U.S or international markets.

Again, we have a strong balance sheet and have sufficient cash and borrowing capacity for both operations and for any acquisitions that may come to us in 2009. On behalf of Jai, Kirk and all of colleagues around the world I want to thank you for joining us this morning. Now let's open the call for your comments and questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Quintin Lai with Baird.

Quintin Lai - R.W. Baird

Good morning and welcome Rakesh.

Rakesh Sachdev

Thank you.

Quintin Lai - R.W. Baird

Jai, you got to mention a little bit about trying to set realistic expectations for the year, your web businesses or with daily sales business, so could you kind a talk... kind of differentiate between what you are seeing with your daily business and in terms of trends as they went from the fourth quarters to January and then talk about may be your large order business on the SAFC side. Are you seeing push out or cancellations of projects?

Jai Nagarkatti

There are two separate questions there. Let me kind of address each one of them separately, Quintin. That business what we've seen is the number of visits as we indicated in our presentation earlier, and in some days and months reached record level. In the fourth quarter we had three million visits per month, that is a record. Now, we had also mentioned earlier that there is a correlation between visits, pages clicked and the number of people who buy sales.

As a result again last year we grew our sales through e-channels and now research sales to e-channels have reached a new record of 42% of sales. Now, people visit our website for a number reasons, one is to gain information and to place orders. We also get orders over the phone. Now when we look at this activity what we see is I think in the fourth quarter, we did see that the number of people are making, buying decisions versus those that come for information, the ratio was be more towards people who are coming for information and at a high level.

Now on the SAFC, large pharma orders the situation is a different story. There, what we have seen is customers are taking a longer time to make buying decisions. And folks that are coming in, people usually probably shop around.

Quintin Lai - R.W. Baird

Okay. And, so I guess as you're looking at that, I mean, you talked about limited visibility. Does that mean the old metrics of looking at bookings are kind of now in limbo? I guess what are your customers saying what their needs will be or how much window of opportunities are you giving to say, okay, turn this project on, turn it off, month-to-month?

Jai Nagarkatti

Okay. On the SAFC, we have always shared with you what the status of our booked orders for future delivery is. We don't stop looking at that. In fact that number is stable. It has not grown significantly but it is stable. What is happening is customers are pushing the delivery times on many of these orders from one quarter to a different quarter, or some times they call in and say hold off this project. We have not seen big significant cancellations.

Quintin Lai - R.W. Baird

Super. Thank you. And just a follow-up. Just on the mechanics of the FX. As we go through the year and the FX... the inventory gets more adverse, so should we run that $0.30 of adverse EPS more or less through the GP line? And then the offset, it will be to the pricing and then maybe, some lower SG&A or R&D? Little color would help there.

Rakesh Sachdev

Yeah, so, I think you're right, the $0.30, if the exchange rates remain at current levels will largely flow through the GP line. And the initiatives that we have in place, also largely will help us on the GP lines. So, I would say overall, with the initiatives that we have around both volume and supply chain and procurement initiatives, they should offset that as well on the GP line as well.

Quintin Lai - R.W. Baird

Thank you.

Operator

Your next question comes from the line of John Roberts with Buckingham Research.

John Roberts - Buckingham Research

Good morning, guys.

Jai Nagarkatti

Good morning, John.

Rakesh Sachdev

Good morning.

John Roberts - Buckingham Research

The $0.30 hit in '09, I imagine in the fourth quarter of '09 we will have anniversaried much of currency so that, that $0.30 is maybe $0.10 a quarter in the first three quarters. I just wanted to get a sense, because you had just such an abrupt move late in the year of currency, it's not averaged over every quarter in '09?

That $0.30 might be 10, 10, 10 and zero or could you give us a sense of how this might seasonally play out here as we go through?

Jai Nagarkatti

Sorry. Again, we're not giving quarterly guidance, but I think you could assume since we have a lag between the time we put our products into inventory and then flush them out. And that's going to start showing up in Q1 as we will see the first... I mean impact... negative impact in Q1. It may be slightly less than the average for the year, but as a thumb rule, I would say you could assume that it would be about 25 to 30% of the total $0.30 in Q1.

John Roberts - Buckingham Research

Okay. And then secondly, do acquisitions tend to pick up in weak economies or do they tend to slowdown because maybe sellers don't want to sell into weak markets and they are going to hold out until things start to recover in market valuations and so forth.

Jai Nagarkatti

John, as we have always said cheap doesn't mean good, number one. The second thing is, we have always had a strategy of acquisitions that should fit in our overall strategy. That being said. We are constantly looking at companies. We are constantly looking at other avenues to acquire technology as well.

Now as to valuation because of the current market price, I think the question remains that hearts (ph) of sellers, if they had a good thing they are sitting on, why would they sell in even lower cheap economy.

John Roberts - Buckingham Research

So, maybe you are seeing less than high quality type opportunities right now being presented to you.

Jai Nagarkatti

I think we continued to see the technology, because most of the smaller technology, the type of stuff that we are interested in continues to happen in academics and we get a lot these things coming our way.

John Roberts - Buckingham Research

Okay. Thank you.

Jai Nagarkatti

It's not changed any.

Operator

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

Isaac Ro - Leerink Swann & Company

Hi, guys, thanks for taking the question.

Jai Nagarkatti

Hi, Isaac.

Isaac Ro - Leerink Swann & Company

Hi, first off on the inventory, just wondering if you could walk us back to 2008 as the year progressed, was that inventory at seven months, something that was perhaps a bit higher than you might had it in your business plan at the beginning of the year. And then what is the normalized level of inventory you'd like to keep on hand when you talk about your working capital improvements and so forth?

Rakesh Sachdev

We've had a track record over the last, I think two or three years of slowly reducing our inventory. So if you look at our months on hand, I think we now, less than seven months on hand, I think we are at about 6.7. And, again we plan to continue that march and further reduce our inventory as we go forward. So, internally we are planning to further reduce our months on hand in 2009.

Isaac Ro - Leerink Swann & Company

Okay. And then just a big picture on the guidance here, it would be a modest decline in reported revenues. And then, it sounds like a little bit of pressure on gross margins. At the same time you're kind of expecting pre-tax margins to improve marginally. So, I'm wondering if we get to the bottom line, how much of the contribution do you expect from some of these SG&A and R&D cost containment initiatives versus maybe a lower tax rate and share count.

Jai Nagarkatti

Well, I think when we say we will see a slight improvement in margins; we should see an improvement in both, gross profit margins as well as our operating margins. And our SG&A as a percent of sales probably would be flat or maybe a little down over the year.

Isaac Ro - Leerink Swann & Company

Okay. And then, for tax rate, what should we look at for '09?

Jai Nagarkatti

Our tax rates will be slightly up. We are saying that we'd be somewhere between 31 and 32%. And we ended 2008 at slightly over 30%.

Isaac Ro - Leerink Swann & Company

Okay. Got it. And then just lastly, I think that you guys have talked about one or two quarters maybe, outlying a little bit more on your three year strategic plan. Are you guys going to give a little more color on that, maybe your analyst meeting later this year or, should we hear on that sooner, specifically as it relates to how you're prioritizing the acquisition environment versus maybe share buyback?

Jai Nagarkatti

As I have indicated earlier, I think we launch a strat plan every three year. This is the first year of the three year plan that we have already put in place. I mean, they broadly fall into three categories, the accelerating things that have worked well for us; many other things that we introduced in the last plan. And then we are also doing the process plan that there are opportunities where we could even do better. And that's there we'll elevate.

And, to answer question specifically, I know in March, we have an open Analyst Day. And you'll get to see a little bit more detail on the sub-initiatives within those accelerate, elevate and initiate, three pronged attack that we have put in place. And see the changes to the organization and the resources that we've have allocated to execute that.

Isaac Ro - Leerink Swann & Company

Okay. Thank you very much.

Jai Nagarkatti

Thanks.

Operator

Your next question is from the line of Dmitry Silversteyn with Longbow Research.

Dmitry Silversteyn - Longbow Research

Good morning. I'd just like to follow-up a little bit on the end market conditions that you're seeing right now. You talked about pharma being slow, which was seen I guess at the beginning of the third quarter, so that is a continuation of the trend, maybe accelerating a little bit with the Pfizer Wyeth combination and some PhD scientist being led off here.

Then you talked about the chemical and the industrial markets being soft. Can you mention what your high-tech markets are looking like given the severe downturn in the semiconductor and electronics sectors? And also talk about academic markets both, in the U.S. and abroad and whether or not the expectations of a higher NIH budget for '09 are going to be a meaningful positive for you or whether it's too small a customer segment to make much difference to you?

Jai Nagarkatti

Okay. Couple of things, I think, first of all, your question has all of the answers in it as well. As you said, the pharma and the chemical industrial customers, that's where we was the more significant of an impact And the academic accounts throughout the year, including the fourth quarter continued to be exactly what we thought they would do that, they were performing very well, and in all regions, in the U.S. and in Europe.

Biotech companies, which does not include the pharma also was very strong and the business that goes through a subset of the diagnostic companies that was also strong. So, roughly 80% of our business, which is going into these markets grew in the fourth quarter as well as the whole year, mid-single digits or at a higher level. The pressure is in the pharma and the chemical industries.

Now having said that, I had a second question on high-tech. See our products in the high tech don't go to the end markets to the same extend as they are going into the discovery type inventions and new products. So to that extent, we are seeing that these companies, who ask us for the product, continue to do their research and ask for new products. So those projects are growing very fine, in fact in some cases, higher than the mid-single digits.

Finally, looking at the NIH picture, I think certainly, the queue is getting longer; everybody is waiting for that money to be approved. It's positive news for a company like Sigma-Aldrich but it remains to be seen how this money is actually going to be allocated. If more of it goes to fund research projects and people, that definitely should help us. But let me also tell you that we have not taken that into account in our business planning or giving you the guidance. So if that happens and the money goes towards research, I think certainly it should benefit us.

Dmitry Silversteyn - Longbow Research

Okay, that's very helpful Jai, thank you. And then just final question; what I'm... make sure to understand your operating profit guidance I mean historically Sigma has never talked about operating margin expansion. You began talking about it in conjunction with the new pricing (ph) reduction and inventory reduction plan and cost optimization plan for the next five years. Now, with despite the slower volume growth and the foreign exchange headwind you sound very confident that both of your gross margins and your operating margins are going to be up on year-over-year basis.

So, aside from pricing which is always a good contributor to margin, can you talk about what else you will be able to do to offset that $0.30 headwind from foreign exchange to allow your margins to comp off year-over-year?

Rakesh Sachdev

Yeah, sure. Let me just start by saying that unless there is a significant further deterioration I think we feel pretty good that we will be able to be at or above our margin level, even in this climate. The $0.30 is a number of initiatives, it's not just one initiative. Obviously we have said the supply chain and the procurement initiatives that should add easily in excess of $0.10, some where between $0.10 to $0.15 and we are still planning on some modest growth. We have got some effect of the September pricing action. As you might recall, we had a pricing action in September that's going to have a full year benefits for us in 2009. We have got other cost containment action that we have kicked off in the company. So as a combination of all that we still feel pretty good about getting that $0.30 or more.

Dmitry Silversteyn - Longbow Research

Okay. It sounds like the higher pricing which we will able to achieve which we will at least carry for the first three quarters of the year and the... your regular cost cutting as well as the incremental cost cutting that you are hoping to get done is going to offset the other $0.20, that the supply procurement that will take care of?

Rakesh Sachdev

Sure absolutely.

Dmitry Silversteyn - Longbow Research

Okay, alright thank you.

Operator

Your next question is from the line of Douglas Judy with KeyBanc.

Douglas Judy - KeyBanc

Good morning. First, I just want to get your thoughts on the underlying markets of both research chemicals and fine chemicals. You talked about your ability to grow in excess of the markets. So I was wondering what's your assumptions were there and also maybe talk a little bit about what exactly you're going to do to continue to drive market share. I think you have been successful in passed weak economic environments at growing market share.

Jai Nagarkatti

Yeah, you really, historically what we have said, our goal is to take market share. These are unusual times with limited visibility into the future and we really don't have a good understanding of how the customers will react to the current economic situation. So as a company in 2009, we also have this FX issue that Rakesh spoke about that you can, we are prepared to handle.

So while we are cautious in giving our guidance, our feeling is that, because of the consolidation in the pharma industry, people being cautious, the markets for both research and fine chemicals would actually shrink in 2009. And the initiatives that we have put in place like the new capacity in various specialized manufacturing capability would give us an opportunity to probably aggressively go after some of the outsourcing that could happen as a result of the consolidation. That's one.

A number of new products that we have launched in our research biotech areas like the zinc finger nuclease technology and focus on the anti-bodies which are all gaining momentum much in line with what we talked would also contribute to this growth.

The new products that we are making in the SAFC hi-tech which are directed towards the renewal energy, energy storage and the various material science applications which are probably lot more in focus in the area of research, we are very well positioned and we think a combination of all of these new capacity in specialized areas, focusing in some bio-tech areas and our hi-tech product expansion opportunities will all help us contribute to mitigate and navigate these uncertain economic time.

Douglas Judy - KeyBanc

All right. Thank you. And just secondly you commented on the prices increase that went through in September, it sounds like those were fully successful. And do you anticipate any additional price increase this year or do you think the current environment does warrant additional increase. You mentioned before customers kind of shopping around on the SAFC side?

Jai Nagarkatti

I think, we have to be careful on the pricing and we have always been careful on the pricing, because we believe in providing value to the customer, and obviously we will have to wait and see how we want to adjust the pricing issue. Obviously in this difficult economic situation, we don't want to put an additional pain on the customers. Having said that, we have... leave all options open.

Douglas Judy - KeyBanc

All right. Thank you. That's all I had.

Operator

Your next question comes from the line of Oliver A. Marti with Columbus Circle Investors.

Oliver Marti - Columbus Circle Investors

Great. Thank you. I was just trying to clarify the commentary regarding FX and the inventory. If I heard correctly, it sounded as though the gross margin this quarter benefited from the sale of the lower-priced inventory earlier in the year. I'm just trying to clarify, if you could quantify that into were there any other FX gains in the gross margin? Thank you.

Jai Nagarkatti

I think, the large part of that was just the fact that we made some stuff in the U.S. earlier in the year and finally and transferred it international and sold it in the fourth quarter, and that gave us the $0.02 advantage, but that's significantly lower than the contribution from currency oil caused in the earlier quarters.

Oliver Marti - Columbus Circle Investors

Okay. And then any FX benefited all in the gross margin from just whether its financial or hedging or what have you?

Jai Nagarkatti

Well, first of all we don't do any speculative hedging. We do lock in the known result, but as Rakesh said earlier, we don't expect the benefit we saw in the fourth quarter to carry over to 2009.

Oliver Marti - Columbus Circle Investors

Okay. Thank you.

Operator

Your next question is a follow-up question from the line of John Roberts with Buckingham Research.

John Roberts - Buckingham Research

Do you think the rate of growth in your web based sales is linked to the demographics of your customers, i.e.; younger scientist tend to purchase via the web and older scientist tend to use the catalogs. And I asked that because, we are going through a period of lay-offs now and restructuring among many of the big pharma customers, I don't know if that shift the demographics if they are letting older scientist go, and the younger scientist are picking up the work, whether that's going to accelerate a shift towards web based sales?

Jai Nagarkatti

I think on the trends that these are, we don't keep track by the ageing or the experience of chemist, trying to track who's coming through what channel. I think that you have given me good idea to track that perhaps. But I think we do look at on the other hand is, geographically which areas are growing. I think what we do see is rapid adoption in the Asia Pacific region and Europe is following as well.

So, that our focus in expanding Asia Pacific, we are doing a number of things to keep our researches in these regions interested and motivated to come to our website. We spoke last time about Japanese language translations that we had put in place on our website that will soon be up and running. And similarly we will put those types of enhancements that attract researches regardless of age.

John Roberts - Buckingham Research

Thank you.

Operator

Your next question is a follow-up from the line of Quintin Lai with Baird.

Quintin Lai - R.W. Baird

Hi, thanks for taking the follow-up. Could you help us out with what are you giving, I guess what rates are you paying on your commercial paper. And then just talk a little bit about the amount that you have in short-term debt. How do you see that I mean going through the year and then balancing uses of cash, with I guess going after that versus maybe buying back more stock?

Jai Nagarkatti

Sure. In terms of rates there well below 50 basis points at this point. So that will continue to be an advantage early in 2009. I think what Rakesh said earlier is, we hope to generate about the same amount of free cash flow as we did in 2008 and our share repurchase while still haven't been formed, will likely not be as large as it was in 2008.

Operator

Your next question is from the line of Jon Wood with Bank of America

Unidentified Analyst

Thanks, it's actually Brian couriered (ph) in for Jon this morning. Can you discuss your ability to continue to manage DSOs in 2009? It doesn't look like your cash flow guidance appears to see any deterioration in the working capital metrics. Have you seen any signs of that recently?

Jai Nagarkatti

Not really I think, our DSOs, if the U.S and Europe and the CAPLA Region, the Asia-Pacific regions have been running pretty flat. And every now and then you had some customers who have run into a trouble but as you know, we have hundreds and thousands of customers. So if problem occurs with one customer its so small it really doesn't make difference. We aren't seen any overwhelming trend on that side as yet, and don't really expect that.

Unidentified Analyst

Okay thanks and your CapEx guidance looks a little bit higher then I guess we would have expected approaching roughly 5% revenue here. Can you give us a better sense of the factors behind that forecast and does foreign exchange influence the number at all?

Rakesh Sachdev

No there is real increase in capital expenditures we have set a $110 million versus I think it was about $90 million in 2008. And so there is additional $20 million. We have some significant programs, where we are investing there investing in Asia Pacific, we are investing in Europe, we are investing in Israel. We are also investing in Wisconsin, we have a major investment in California.

So we have several investments happening which I think as Jai spoke about we are getting into very specialized manufacturing which should help us not just really with pharma companies and several other companies. So we are excited about the investments taking place in 2009.

Unidentified Analyst

Thanks.

Operator: Your next question is a follow-up from the line of Isaac Ro with Leerink Swann.

Isaac Ro - Leerink Swann & Company

Hi guys, you know my first follow-up was already answered so I guess another one might be on China; what you seeing there year-to-date in terms of business trends. I know you guys are investing pretty heavily there and seeing good success. Just wondering if year-to-date that regions off to a slower start or faster than you might have expected?

Jai Nagarkatti

I can tell you that what happened last year all of last year China was steel continuing to be a strong performer for us, as we have a number of initiatives going on there. We've started by expanding our warehouse and service levels. And that certainly has helped. We have made a commitment to expand our presence there over the long haul. You saw the announcements. We are really pleased that China last year grew over 20%.

Isaac Ro - Leerink Swann & Company

Okay. And then year-to-date, can you comment at all on the environment there?

Jai Nagarkatti

I think right now, I can say that, know what visibility we have is this doing still refine.

Isaac Ro - Leerink Swann & Company

Okay. And then just last one here is on the semiconductor market. I think the question was asked, at least partially regarding how you're planning for that end-market to work this year. Do you a have rough expectations for how your business within the semiconductor business is going trend this year?

Jai Nagarkatti

As I mentioned earlier, I think we have small amount of projects in the semiconductor industry that are going into actual manufacturing. But there are some gases, specialty gases that we supplied without really telling you telling you what those gases are. That part of the business is growing very nicely and we hope that it continues to grow.

Then, the other components within the semiconductor industry are products that we are actually precursors for advanced applications. That's still in the research stage and development stage. And as I indicated earlier, the demands for that is good. So, overall what we are hoping is that these new products are successful with our customers so that we can benefit over the long haul being a commercial supplier.

Isaac Ro - Leerink Swann & Company

Okay, great. Thank you very much.

Operator

(Operator Instructions). Your next question is from the line of Dan Leonard with First Analysis.

Dan Leonard - First Analysis

Hi, guys. Good morning.

Jai Nagarkatti

Good morning, Dan.

Dan Leonard - First Analysis

Hey, Jai. I was just hoping you could share with us what your research business looks like in the month of January. Was that up low single-digit, or is it up higher than that?

Jai Nagarkatti

Dan, as we probably know that we don't want to give any guidance quarter-by-quarter. We all know that we are ... like us, you are also anxious to see what is happening to our business. But I can tell you that I think we all know that the global economic softness will take time to recover. And we have considered that as we have put our annual plans and shared with you what we expect to achieve for the whole year. That's about what I'd like to answer.

Dan Leonard - First Analysis

Okay. Thank you.

Operator

Your next question is from Jon Wood with Bank of America.

Jon Wood - Bank of America

Thanks. Guys, if we look back to 2003, your organic growth rate was flat and volume in your research business was down roughly 3 to 4%, how can you comfortably estimate organic growth in 2009 given how much worse this cycle seems to be?

Jai Nagarkatti

That's one of the reason we have ... we learn from what you learn from your past experience. That's why we are hesitant to give you the guidance this time around to make sure that we really understand the impact of how the recovery takes place. But, I can tell you that even in 2003, 2002 and 2003, even when the markets were shrinking, we took share. And that's precisely our intention this time around as well.

Operator

And at this time, there are no further questions.

Jai Nagarkatti

Okay. Then, we'd like to thank everybody for their participation. In just looking forward, we do expect to release results for the first quarter of 2009 before the markets opens on April 23, we'll follow that with another conference call that same day, again at 10 o'clock Central Time.

Before reporting these results and I think we've said that earlier in the conference, we will be holding our annual business review at our life science and the high technology center here St. Louis on March the 18. We certainly invite all of you to join us for that event. It will also be webcast if you're unable to join us in person, and you can find registration information for the webcast or attendance in person on our website. That concludes today's conference.

Operator

Ladies and gentlemen, thank you for joining the Sigma-Aldrich fourth quarter 2008 results conference call. You may now disconnect.

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