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Millipore Corporation (NYSE:MIL)

Q4 2009 Earnings Call

February 2, 2010 4:45pm ET

Executives

Joshua S. Young - Director, Investor Relations

Martin D. Madaus - Chairman of the Board, President, Chief Executive Officer

Charles F. Wagner Jr. - Chief Financial Officer, Vice President

Analysts

Jon Wood - Jefferies

Isaac Ro - Leerink Swann

Ross Muken - Deutsche Bank

Dan Leonard – First Analysis

Marshall Urist – Morgan Stanley

Tycho Peterson – JPMorgan

Marshall Urist – Morgan Stanley

Eric Kriskola (ph) - Thomas Weisel

Jon Groberg – Macquarie Capital

Operator

Good afternoon. My name is Stephanie, and I will be your conference operator today. At this time I would like to welcome everyone to Millipore's fourth quarter and full year 2009 earnings conference call. (Operator's Instructions) I would now like to turn the conference over to Joshua Young. Please go ahead.

Joshua S. Young

Thank you very much Stephanie. Good evening, I'd like to welcome everyone to Millipore's fourth quarter and full year 2009 earnings conference call. My name is Joshua Young and I'm the Director of Investor Relations for Millipore. Joining me on today's call are Martin Madaus President Chairman and CEO and Charlie Wagner Chief Financial Officer.

In addition to the earnings release we issued earlier today we will also be referencing a slide presentation as part of today's call. This presentation can be viewed by clocking on the web-cast link on the millipore.com homepage or by accessing Millipore's investor relations website. A PDF copy of our slides will be posted to the website after the call.

We will also be highlighting non-GAAP financial information. Our reconciliation of our GAAP financials to our non-GAAP financial measures is included in our earnings release and posted on our website.

Before we begin I would like to make the usual Safe Harbor Statement that during the course of this conference call we will make forward looking statements regarding future events for the financial performance of the company that will involve risks and uncertainties. The company's actual results may differ materially from the projections described in such statements. Factors that might cause such differences may 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 02, 2010. 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 2010 financial results. Now I'd like to turn the call over to Martin Madaus.

Martin D. Madaus

Thank you, Joshua. Good evening everyone and thank you for joining us today on the call. I'm very pleased with the outstanding financial results Millipore generated in 2008 – 2009. Our fourth quarter performance was indicative of many of the same trends we have experienced throughout the year. I would say the key takeaways for 2009 are the following.

First, we generated excellent financial performance in the midst of one of the worst global recessions we have seen in the last fifty years. We have met or exceeded our guidance for revenue growth earnings and cash flow. This is a testament to the resilience and strength of our business model. We have percentage of revenues we derived from consumer products and the attractiveness of our core markets makes our business less susceptible to economic downturns. Millipore is one of the most attractive franchises in the life science tools market and our excellent execution in a very challenging market enables us to report strong performance in 2009.

Second, our bioprocess division had a great year and rebounded and as we had predicted in our earnings call one year ago the significant amount of exposure that we have to the biotech industry benefited as these customers increased their levels of production for monoclonal antibodies and vaccines.

Third our bioscience division outperformed most of its peers during 2009 despite weak demand from large pharmaceutical customers and a challenging environment for laboratory instrumentation sales. For the past few years we have expanded our exposure to academic customers and life science consumable products and this really helped us to be less affected by lower levels of capital spending.

Fourth, 2009was a year in which we significantly advanced our innovation strategy. We increased our R&D spending by 12% completed four acquisitions and signed eleven technology agreements. The strength of our business provided us flexibility investor in the downturn which will benefit our future growth. We began our journey to transform our R&D capabilities when I joined Millipore five years ago and I'm more (inaudible) today than I ever have been about the potential impact of the new products we're bringing to the market.

Finally our cash flow performance in 2009 was exceptional. We generated nearly $300 million of free cash flow. An important driver of this performance was a substantial increase of our working capital efficiency, and this improvement was the result of initiative we have launched the past eight months. I'm extremely pleased with our excellent cash flow performance.

So these are the key takeaways. Let me move now into a bit more detail about the results of the fourth quarter and the full year 2009.

Fourth quarter revenues increased 7% to $426 million excluding a 5% favorable effect from changes in foreign currency exchange rates. Organic revenue growth in the quarter was 2%. From a divisional perspective if you exclude the effects of changes in foreign currency rates the bioprocess division grew 4% organically. The bioscience divisions revenue was unchanged from the previous year.

Our fourth quarter revenue growth was adversely affected by six fewer days in the quarter compared to the fourth quarter of 2008. Charlie will talk more about the effect that fewer days have on the quarter.

On the bottom line we recorded $1.00 in non-GAAP earnings per share which was $0.05 higher than last year. Our free cash flow grew nearly $8 million year over year to $65 million in the fourth quarter.

In the full year 2009 we reported revenues of $1.65 billion which represented 3% growth over 2008 excluding a 3% unfavorable effect of changes in foreign currency exchange rates. We generated 6% revenue growth over the full year. That includes a 1% impact from acquisitions.

From a divisional perspective, if you exclude the effects of changes in foreign exchange rates and acquisitions not in the base period, the bioprocess division grew 8% organically and the bioscience division generated 2% organic revenue growth. They generated $4.00 in non-GAAP earnings per share resulting in 11% growth for the year.

I would point out that this earnings per share growth is impressive when you factor in our higher levels of R&D spending and a much higher tax rate.

Finally our free cash flow grew 54% over 2008 totally $298 million. So let me now focus on commentarying (ph) each division and I'll focus the discussion on key drivers for the full year 2009 performance and I'll start with the bioprocess division.

The bioprocess division generated growth in all geographies and showed strength during each quarter of 2009. Our large biotechnology customers drove most of the growth. These customers rebounded from a lower level spending from last year.

Our bioprocess division generated more than $450 million in revenue from the biotech industry in 2009. This portion of our business is growing in double digits. We are seeing now more investment going into the biotech industry than ever before, particularly as large pharma customers move a higher portion of their new product pipeline into biotech derived therapeutics, so our leadership position in the biotechnology industry, particularly with large customers clearly benefited us in 2009.

Many biotech drugs generated healthy growth and were relatively unaffected by the weak economy. The level of manufacturing activity associated with monoclonal antibodies has been very strong. It's driving higher demand for our products. Additionally we saw a positive impact from customers ramping up production manufacturing for new products which are expected to be approved by the FDA this year. Although I would say the environment for new drug approval is not back where it used to be a few years ago, it is clearly improving.

Another driver for our bioprocess performance in 2009 was the higher level of production related to H1N1 flu vaccine. Most of demand relating to H1N1 vaccine production came in the second half of the year particularly in Europe. It is unlikely that the high demand created for H1N1 production will repeat again this year, but vaccines as a category will continue to be an important growth driver for Millipore in 2010 and beyond.

We expect that production for the regular flu vaccine will continue to be solid. We also benefit as more subculture based vaccines make their way to the market over the next years. These types of vaccines require more purification technologies than many of the egg-based vaccines that are in the market today, and that is good for our business.

Now let's talk about geographies. From a geographic perspective the division grew double digits in the Americas and Asia while generating single digit levels of growth in Europe. Historically, Millipore's business in Asia has been primarily driven by our science division, but what we're now seeing is that the bioprocess business is catching up fast in the region as new biopharmaceutical production capacity comes online. We had a record year in China and in Singapore and we continue to see investments into the Asian biotech industry by multinational companies, by governments, and also by contract manufacturing organizations.

During the last year we opened up a new applications, training, and scaleup facility in Singapore and e have plans to open a similar factory in Shanghai later this year. Now, the services that we provide at these facilities give us a competitive edge because they are delivered by Millipore employees who are world class experts in their fields. We provide our customers in the region with the same level of support that they receive in Europe and North America and this helps us to win business so I expect that the bioprocess momentum we're seeing in Asian countries will continue throughout 2010.

I'm also very pleased that many of the non-biotech segments of the bioprocess division also generated strong performance in 2009. The primary reason for this strength has been that double-digit growth of our core purification product sold into the plasma market.

We made a decision to focus more of our resources on the plasma market during 2008 and the result of this initiative has been very strong. This program has helped us to gain market share in areas such as tangential flow filtration where we have a great product. We're also seeing the overall market demand for plasma products increase as drug companies recognize the important role that immunoglobulins play in diseases such as Alzheimer's.

From a product perspective, our downstream processing business unit generated double-digit organic growth. We had an exceptional year for our disposable manufacturing products and clearly we were rewarded for our focus on expanding sales, manufacturing, and R&D capabilities in that market segment and this has made our Mobius disposable manufacturing family of products the fastest growing product line at Millipore in 2009.

Many of the disposable capsules in our integrated Mobius disposable assemblies were used in the manufacturing of the H1N1 vaccine, particularly for final fill and finish operations. So we have a really attractive value proposition for these customers as we can significantly reduce customers' process preparation and setup times by as much as 25% and at the same time reducing the risk of contamination.

Other key drivers for downstream revenue growth were also (inaudible) of our new products including the part clarification product, our Pelican 3 tangential flow products and our Viresolve Pro virus purification product.

Moving onto process monitoring, our process monitoring tools products also generated strong growth during the year led by our disposable sampling product NovaSeptum. NovaSeptum lowers product loss for the customer, eliminating the risk of contamination during the sampling process. There has been a significant focus on manufacturing plant contamination in the past few months so products that help customers avoid contamination risks such as NovaSeptum are seeing strong demand in the market.

Our core subculture testing products also generated good growth especially considering that a significant portion of that business is related to the food and beverage industry which is usually more affected by economic downturns.

The upstream bioprocessing business unit which represents 5% of the overall revenues saw growth in the insulin products offset by a decline in the sales of our subculture supplement product Excite. One of the 2009 highlights for this business was the launch of the new cell-ready disposable bioreactor. The product provides process development scientists, so it's for the lab, provides some of the single-use (inaudible) bioreactor that eliminates that time spent cleaning, sterilizing, and assembling blast bioreactors. (Inaudible) expands our disposable footprint into this untapped market and we are very excited about the potential of this product for the future.

So to sum it up, we had a great year in bioprocess. We generated 8% organic revenue growth. We grew faster than the market in important areas like disposable manufacturing, also in Asia, and we expect the same positive trends that drove our business in 2009 to continue in 2010.

Now let's turn to our bioscience division. The division delivered a number of accomplishments in 2009 that are indicative of the transformation we achieved the past few years. First, with 2% organic revenue growth in 2009, bioscience grew faster than (inaudible) due primarily to the strength of continual sales to our academic customers.

From a geographic standpoint we generated year-over-year organic growth in all geographies during 2009 and the growth was fairly balanced between North America, Europe, and Asia. We also continue to make substantial investments to support future growth. We increased R&D spending in the division by 17%/ We also launched a number of important products that will immediately benefit the division's performance. Our commitment to R&D underscores the confidence we have in the future of the bioscience business.

From a product perspective, our life science business unit generated the highest level of growth for bioscience. As you know, we have successfully (inaudible) all our science portfolio, series of acquisitions, took partnerships, and internal investments. And this strategy clearly paid off this year as our life science consumable sales are less susceptible to any swing in demand. These products are really driven by the underlying research activity.

I would say there are two main reasons why the life science business units performed well in 2009. First, we had spent a considerable amount of effort developing and acquiring and launching new products in this portion of our business and these products are selling well as they penetrate the market. Second, we have strengthened our execution capabilities. We can now target attractive market segments, particularly those market segments that see increased spending from universities. So we're much better executing in sales and marketing.

Spending from academic customers held up well throughout the year and we expect this trend to continue in 2010. The highly advertised US stimulus package had little impact on our 2009 performance, but we're now seeing funds slowly start to trickle to our researchers which should be very good for 2010.

Millipore's Multiplex immuno assay kits continue to put up strong performance quarter after quarter. We have built a very good leadership position here in this market by continuing to deliver a stream of new and innovative products. So for example, we recently expanded our offering into cell signaling by launching 40 new kits. That was possible because we made a small technology acquisition for a technology called EpiTech earlier in the year.

We should also highlight (inaudible) guava flow cytometry instrumentation and reagents continue to drive attractive growth to strong uptick of these products in the academic accounts and we were on time and successful at the launch of the new two laser six-colored guava instrument that we launched the middle of last year, and the customer response for this launch is very strong and resulted in a healthy order of growth and a very solid sales pipeline. This should be good and positive driver for this year.

Finally we continue to build on our franchise in cell biology and generate good results for our subculture products (inaudible) many of them are used for stem cell research another important area in research.

The portions of our bioscience business that were weaker in 2009 came really as a result of cost reduction and research functions at large pharmaceutical customers. Throughout 2009 these customers rationalized their drug pipelines, reassessed their research priorities, and focused on integrating acquisitions. The actions had a significant impact on our small molecule drug discovery service business as pharma companies had delayed or cancelled their service contracts. The good news is now demand from pharma customers appears to have stabilized as we are entering 2010 so for example our lead optimization services which are primarily focused on small-molecule drugs generated better performance at the end of the year and we saw a higher number of requests and proposals from pharma customers looking to outsource research.

The strength in this portion of the business was our biopharmaceutical services business which benefitted from a higher focus on biotech molecules and we expect this business to remain strong in 2010 and we'll also benefit from the bio (inaudible) acquisition we completed in Q3.

We'll talk next about lab instrumentation. Given that the end markets for lab instrumentation were depressed in 2009, our lab order business held up fairly well picking up modest growth. This performance was clearly down from what the business had delivered historically, but still had solid results in the middle of a tough year as very few instrumentation businesses generated growth in 2009. There's still some uncertainty about the recovery of the laboratory instrument markets, but we clearly seeing a recent improvement in our sales pipeline for Lab Water instruments. What helped really to drive Lab Water performance in 2009 were the sales of our services and consumables. The other part that grew well in 2009 was the products that ares old into the clinical diagnostic laboratories and these products will continue to become a very important growth part of the Lab Water franchise.

Lab Water will benefit as we see a recovery in capital spending and an improved environment for selling laboratory instrumentation. And the good news is that we believe that the environment is improving and the business will generate better results in 2010.

So I would sum up to the 2009 bioscience performance as follows; the division generated respectable results during a challenging period, some of the end markets that were weak in the first of the year showed improvement in the second half of 2009 and we had a very strong year of new product introductions. We signed 11 technology agreements, we completed the guava acquisition and we increased R&D spending in the division by 17%. We've doubled down our investment in many attractive markets at a time when many other companies were cutting back their spending.

We will benefit from these investments, particularly as the end markets will recover. So I'm excited about the future of our bioscience business and the potential impact that these initiatives will have in the future.

As I mentioned before, Millipore is very committed to driving growth renovation. We spent a lot of time and resources to advance our innovation priorities and it's starting to pay off in the market. Now I'll just spend a moment and give you more detail on how these innovative products will drive value for our customers.

On this slide I show a picture of one of the recent products we've launched in bioscience which builds on a strong franchise we have established in cell biology. It's a product called Scepter. Scepter is the world's first automated cell counter that fits into the palm of your hand. Now Scepter transforms a very mundane task that almost every cell biologist worldwide needs to complete every day, counting cells. Each year researchers spend millions of hours counting cells to investigate disease. Scepter not only counts, but dynamically analyzes cells in 90% less time and eliminates the errors made by research doing these counts manually. This is a great example of how we are improving work flows that researchers need to do every day.

Scepter solves a common pain point for research and that's at the heart of what bioscience really does, it's the heart of our strategy fundamentally improving the customer workflow by combining our products and application expertise. Our (inaudible) as an instrument and disposable business and the disposable micro fluidics tip is proprietary for Millipore.

The next example I want to share with you is the new Millipore detection system for micro plasma which was recently launched by the bioprocess division. This system is the first solution of its kind for the early detection of micro plasma contamination in the highly regulated biopharmaceutical manufacturing industry. It cuts the time to detect contamination from 28 days to four hours and it's the result of several years of collaborative work with our partner Roka Bioscience, formerly part of Gen-Probe. Faster and more robust detection enables biopharmaceutical manufacturers to test more frequently and then take corrective action earlier in the production process and that reduces financial risks and optimizes product use. We think this product has tremendous value for our customers and targets a very large potential market.

So these examples should give you a greater level of confidence about Millipore's capabilities to innovate. Scepter and Millipore are only two of many, many new products that we're excited about and we have truly invigorated our R&D efforts over the past few years at Millipore.

I will close by saying that 2009 was a year of terrific financial performance for Millipore. We delivered attractive revenue, earnings, and cash flow growth by making investments for the future, advancing our leadership position in the life science market by continuing to launch new and innovative products and making acquisitions. I am confident that our momentum will continue into 2010 and we will deliver another strong year of revenue growth, margin expansion, and strong cash flow. Now I'll turn the call over to Charles.

Charles F. Wagner Jr.

Thanks, Martin. Let me provide some additional details on the fourth quarter and the full year results before providing out outlook for 2010. I'll begin with a discussion of our GAAP operating results in the fourth quarter. Total revenues increased 7% from last year's fourth quarter totalling $426 million. Excluding a 5% favorable impact from changes in foreign exchange rates, organic revenue growth was 2% in the fourth quarter.

Martin mentioned earlier that our fourth quarter revenue growth was adversely affected by six fewer days in the quarter compared to the fourth quarter of 2008. As a reminder, we had five extra days in Q1 2009, and while the difference in days was inconsequential to our full-year performance, it did affect the comparability of our first and fourth quarters. This slide illustrates the impact on our Q1 and Q4 quarterly growth rates. As you can see, our revenue growth in Q1 and in Q4 was roughly three to four percentage points above and below the average growth we reported for the year. And while we can't precisely quantify the impact of the days, we know that much of the difference in quarterly growth rates was due to the difference in days.

Our gross profit margin in the fourth quarter increased 250 basis points on a year-over-year basis to 54.3% from 51.8% in Q4 2008. Our SG&A costs increased 2% on a year over year basis due primarily to higher currency translation and incentive compensation in the quarter while our R&D spending was up 19%. Our GAAP operating margin increased 360 basis points to 15.3% from 11.7% in Q4 2008 and our earnings per share increased 39% to $0.78 from $0.56 in Q4 2008. Our fourth quarter GAAP profitability benefited from roughly $13 million lower of one-time costs compared to the fourth quarter of 2008.

From a geographic perspective and excluding the effects of foreign currency translation, our revenues grew 7% in Asia, grew 1% in the Americas, and declined 1% in Europe. Our bioprocess division experienced growth across all geographies with double digit growth in Asia while our bioscience division generated revenue growth in Asia and the Americas which was only partially offset by declines in Europe.

On the next slide we show our Q4 2009 non-GAAP operating results, and please review the non-GAAP reconciliation table in the press release for a detail of all our adjustments. Our Q4 2009 non-GAAP gross margin of 55% increased 100 basis points on a year-over-year basis due to a positive impact from changes in foreign currency and favorable pricing. Non-GAAP SG&A expenses represented 28.7% of sales, up from 28.5% in Q4 2008 with increases in currency translation and incentive compensation accounting for most of the increase. R&D spending was up approximately $5 million or 19% and represented 7.3% of sales, an 80 basis point increase from last year's fourth quarter.

As a reminder, we mentioned earlier in the year that we'd increase R&D spending by $8-$10 million in the second half of 2009 compared to the second half of 2008. With a $9 million increase in the second half of 2009 we delivered on our plan to accelerate our investment in a number of important R&D projects. The increase reflects higher headcount, incentive compensation, project related spending, and payments to third-party technology partners.

Non-GAAP operating margin in Q4 2009 was 19% which was roughly flat with Q4 2008. Our non-GAAP tax rate in Q4 was 19.6%, up from the 14.9% we recorded in Q4 2008.

Net interest expense was $11 million, approximately $2 million lower than last year due to our much lower debt balances, and finally, we reported $1 in non-GAAP EPS which was $0.05 higher than Q4 2008.

Moving on now to the GAAP results for the full year, total revenues increased 3% compared to 2008 excluding a 3% unfavorable impact from changes in foreign currency rates and a 1% contribution from acquisition, revenues grew 5% organically in 2009.

Our GAAP operating margin increased to 16.2% from 14.6%, and our earnings per share in 2009 were $3.15 compared to $2.47 in 2008 representing 28% growth. Our GAAP pretax income in 2009 benefited from a $9 million gain on our acquisition of guava technologies and a $12 million year-over-year decrease in net interest expense due to lower debt balances.

On the next slide I show our performance by geography for the full year. Excluding changes in foreign exchange rates we've grown revenues in the Americas by 8% due primarily to the strong performance of our bioprocess division. In Europe we've grown the business 4% and that's well balanced between the two divisions, and finally we have grown our business in Asia by 6%, including strong growth in our bioprocess division for the past three quarters. Keep in mind also that our growth in Asia was affected by weak performance in Japan throughout the year.

During the fourth quarter we announced that we had acquired the remaining 60% of our joint venture in India. This is an important transaction as we now have complete control over our operations in the attractive Indian life science market. India has a thriving pharma and biotech industry and is becoming a significant center for research activity. The country's also an important part of our strategy in the BRIC countries which now total more than $140 million in revenues and have generated a compound growth rate of 27% over the last three years. The transaction will not affect Millipore's reported revenues and operating costs since the joint venture has been consolidated in our financial statements since 2006. You will however see the elimination of the below the line charge for minority interest beginning in Q1 2010. Continuing to strengthen our position in Asia will be a key priority for Millipore in 2010.

On the next slide we show our full year non-GAAP operating results, and again I encourage you to review the non-GAAP reconciliation table in the press release for the detail of our adjustments. Our non-GAAP gross margin in 2009 of 56.1% was an increase of 130 basis points due to positive foreign currency impact, favorable pricing, and operational improvements. These positive impacts were offset by product mix, higher incentive compensation costs, and lower manufacturing volumes and inventory write-offs that were partially the result of our working capital initiative.

SG&A expenses represented 28.5% of sales, a decrease of 20 basis points compared to 2008. The effective higher incentive compensation expenses was partially offset by the favorable effects of foreign currency translation. R&D spending increased $12 million or 12% in 2009 and this represented an increase of 50 basis points over 2008 and represented 6.9% of sales.

Our non-GAAP operating margin of 20.6% for 2009 was an 80 basis point improvement from the previous year and on this slide I show the increase of our non-GAAP operating margins over the past five years. Since 2005 we've increased our non-GAAP operating margin by close to 400 basis points and well over 500 basis points when you exclude the effects of stock-based compensation expense which was not in the base period. We've shown that as a management team we're committed to delivering consistent operating leverage in the business and we're confident in our ability to continue delivering year-over-year improvements in our operating margins.

Our non-GAAP tax rate for 2009 was approximately 24%, an increase over last year's rate of approximately 22%, and for 2009 we reported $4 in non-GAAP EPS, an increase of 11% over 2008. Changes of foreign exchange rates increased our earnings per share by about $0.12 during 2009.

Now let me turn to our balance sheet where we reduced net working capital by approximately $23 million in 2009 and improved the key drivers of each piece of our cash conversion cycle. Compared with last year we achieved a seven day improvement in days sales outstanding to 59 days and an 11 day improvement in inventory days to 118 days. Our improvement in DSO was a result of process improvements in customer collections and better enforcement of customer payment terms. For example, we implemented Oracle's advanced collection system and this allowed us to improve the efficiency of our collections process. This simple change had the effect of substantially increasing the average dollar value of collections per week.

Turning to inventory, we improved the way we managed our inventory by executing programs that have reduced our lead and cycle times and shrunk our manufacturing lot sizes and safety stock levels. Importantly, we've achieved these reductions while improving our on-time customer shipment rate. Overall, the net result of these improvements is that we've improved our cash conversion cycle by 17 days compared to the fourth quarter of 2008 and by 12 days compared to the third quarter of 2009.

Continuing down the cash flow statement, cash from operations during Q4 was $83 million. Factoring in capital spending of $19 million we generated $65 million of free cash flow in the quarter. For the full year, cash flow from operations totalled $370 million. We incurred $72 million in CapEx resulting in a record $298 million of free cash flow for 2009. On this slide I show our free cash flow performance over the past three years and we've generated an impressive 57% compound growth rate during this period due to higher levels of profitability, lower capital spending, and consistent improvements in our working capital efficiency. We're very pleased with our cash flow performance as the initiatives we put in place are driving tremendous value and results for the company. We've used a significant portion of our cash flow in 2009 to pay down $173 million of debt leaving us with no debt remaining on our primary revolving credit facility.

Now let me turn to guidance for 2010. As we enter the year we're confident in our ability to continue to delivery very solid financial performance. We expect our bioprocess business will continue to benefit from healthy biotech customers and new drugs and vaccines that will enter the market. We expect that our bioscience business will recover as some of its markets stabilize and return to growth. Most importantly, we believe that 2010 is a year in which we'll see a significant contribution from new products in both of our divisions. We believe the products like Scepter and some of our new disposable manufacturing offerings will have a positive impact on our business as early as the first quarter. We expect that we'll report full year 2010 revenue growth of approximately 7% which includes a 2% favorable impact from changes in foreign currency based on today's rates. Excluding changes in foreign currency we'd expect to generate 5% organic revenue growth in 2010.

We expect to generate non-GAAP earnings per share of approximately $4.35 to $4.45 per share and this EPS estimate is based on a projected non-GAAP tax rate for the full year of approximately 25%. Our guidance also assumes that earnings growth will ramp throughout the year with our highest level of earnings growth coming in Q4.

Now let me turn to the cash flow guidance. We believe that we'll generate $310 million of free cash flow in 2010, and as a reminder, we define free cash flow as cash flow from operations less capital expenditures. Our guidance for 2010 implies a modest recovery for some of our bioscience markets. If these markets return to historical growth rates, or conversely if they were to be weaker than expected, there could be upside or downside to the guidance we've given today.

So to summarize the key takeaways for our 2009 performance, we delivered outstanding financial results in a tough environment and outperformed many of our peers. With 5% organic revenue growth, 80 basis points of non-GAAP operating expansion, and 11% non-GAAP earnings growth. Additionally, we increased our free cash flow by 54% to a record $298 million while paying down $173 million of debt during the year.

Finally, we continued to lay the foundation for the future in our growth by completing four acquisitions signing close to a dozen technology agreements and increasing our R&D investment by 12%.

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

Joshua S. Young

Stephanie, if you could please assemble the Q&A roster.

Question-and-Answer Session

Operator

(Operator's Instructions) Your first question comes from the line of Jon Wood with Jefferies.

Jon Wood - Jefferies

Hey, thanks a lot. Charlie, obviously the cash flow off the charts here in '09 and it seems like you billed some additional working capital improvements into your 2010 outlook. DSOs are at an all-time low from my perspective so where is the additional working capital efficiency come from?

Charles F. Wagner Jr.

Yeah, Jon. We have built in some improvement. The DSO improvement as you point out is very significant so we're not looking for additional improvement there. We'll be working to maintain the levels we have achieved. We do have additional room on inventory in our view and also in payables and some other smaller categories so we think we can continue to drive improvement there.

Jon Wood - Jefferies

Okay great. And then it looks like you ended the year with under two times net leverage, I'm not even sure you can pay down any of the longer-term bonds that are in your capital structure right now. So are you open to repurchase and/or cash dividends in the event you don't spend the excess cash on acquisition opportunities?

Charles F. Wagner Jr.

Yeah, Jon. Obviously we're in a very strong cash position right now. The number one use of free cash flow in 2010 will be to fund the attractive acquisitions. Clearly that's something that we're looking for right now. In the event that those don't materialize we are trying to maintain some financial flexibility. We've got some refinancing of the revolver and the converts to do in 2011 so we're keeping some flexibility there. But as our refinancing plans take shape throughout the year we would consider alternative uses for the cash flow in the event that the M&A doesn't materialize.

Jon Wood - Jefferies

Okay. One more, the Indian JV buyout, it looks like it's about $0.04 or so accretive to EPS, is that math right?

Charles F. Wagner Jr.

Actually, Jon, we're going to have a fair amount of costs associated with that as well so it will be slightly accretive, but some of that earnings will be offset by costs related to the integration.

Jon Wood - Jefferies

Okay, thanks a lot.

Operator

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

Isaac Ro - Leerink Swann

Hi there, thanks for taking the question. Good afternoon. On the bioprocess business I wanted to just talk briefly on two items. One would be just sort of the extent to which you think Mobius and your product development on that side of the franchise is helping you to gain market share and in fact seeing production. Do you see some of that going on?

Martin D. Madaus

Well yeah remember, we came as a second or third entry into the disposable manufacturing market. Through the acquisition we made in 2006 we established kind of a first step in and since then we have increased our product offering and then we came out with the flex-ready product line complete assemblies that really no competitor has in the market. So we're clearly making inroads, clearly outgrowing the market by a huge margin particularly in 2009, and we continue to see that because now we're still the lead in disposable manufacturing. And taking disposable technology and combining it with our state of the art filtration offering is a very good combination so we're clearly gaining market share here.

Isaac Ro - Leerink Swann

Great. And then maybe secondarily to that, do you see a change out there in the biotech industry as it relates to how drug companies build and maintain their inventory? Considering some of the issues other major drug companies have had with inventory management I'm wondering how you think that might improve your opportunities to grow the business with the disposables and the flexibility of those going forward?

Martin D. Madaus

I think inventory management has become more of a focus so it's becoming, I think, more predictable and we're working with more companies to closely align their demand planning with our production planning so it doesn't create these ups and down and that's been an improvement last year. I don't think there's a particular impact using disposables here on the inventory planning question, but all companies, I think they're making more of an effort to be predictable customers.

Isaac Ro - Leerink Swann

Great. And then just very lastly if I could ask on bioscience, you obviously have some opportunities in India through the acquisition of the JV and I'm wondering if you see other opportunities, as Charlie mentioned through acquisitions, to maybe acquire a channel in the emerging markets, or perhaps you prefer to grow through organic build out?

Martin D. Madaus

No, we do clearly both and we've made small acquisitions last year and I would not exclude a regional player to become part of our acquisition target list. There are some companies there — our first priority is however on companies with innovative technologies and products that we can sell globally.

Isaac Ro - Leerink Swann

Thank you very much.

Operator

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

Ross Muken - Deutsche Bank

Good afternoon. So obviously a lot of activity on the new product front and we've seen the increased R&D, have you guys — I guess what kind of statistics or qualitative commentary can you provide in terms of percent of sales coming from products introduced in the last 12 months or anything that could sort of help us think about with some of these really innovative solutions what it's doing to the top line versus what we've seen historically from the company.

Martin D. Madaus

Yeah. I know there's demand for these kinds of metrics. I'm reluctant to share it because the comparability between companies is just not there. Everyone defines a new product differently. We will make an effort during this year to break this out in more detail, but I can tell you that internally we're tracking a number of things. One is percent of sales of new products which has increased dramatically, particularly in bioscience. We also track the value of our development pipeline and discounted cash flow model and we track another four or five other R&D metrics and the majority of these metrics are pointing upwards, that means in the right direction.

And when we make R&D investment decisions we are now in a position to really make tradeoffs between different types of projects and we have shifted some of our R&D money now into higher value more breakthrough projects over the year. A few years ago we were not able to do it and now we can so there's a much, much higher level of R&D management sophistication going on now. But as I said, I know there's demand for this information and we will come out during the course of this year with a meaningful metric that you can track.

Ross Muken - Deutsche Bank

And you know, Martin, you provide a lot of good commentary on some of the struggling end markets for the year. You talked a little bit about Japan, I know that's an important market for you, particularly on the bioscience side, what are we seeing there? And then in small cap biotech land we've seen funding improve, any signs of life in that sort of customer segment?

Martin D. Madaus

Yeah. Japan has been hit hardest by the recession and you can see it as for us Japan has a high percentage of non-biotech business, but also the research funds weren't released as quickly as we hoped. Now that has stabilized a bit so it should definitely be better this year, but those were the main drivers there. The small biotech market has recovered. It's too early to say for us whether there's some true demand coming back. We have kind of landed in the middle here. We saw pharma spending and also small research biotech spending down last year which was really unusual for that market, the first time ever. And so we think this will recover somewhat, which includes small biotech, but we're not seeing for this year a full recovery to historic levels.

Now that could change because you're right, the funding environment has improved quite a bit so that could change. And if the research markets recover for pharma and biotech that would definitely be an upside, but it's too early to call.

Ross Muken - Deutsche Bank

I appreciate it, thank you.

Operator

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

Dan Leonard – First Analysis

A bit of a similar question. Martin, your qualitative commentary in your prepared remarks on revenue growth prospects was very bullish in both segments yet the guidance assumes organic revenue growth remains constant with 2009 levels. So what are some of the offsets to the positive signs you're seeing in both businesses.

Martin D. Madaus

Well first of all, we grew 8% last year (inaudible) process, so the comparisons will be a little bit more difficult there. We do see good trends. They do have to materialize. And just like last year we started out the year factoring in some of the risks. These risks are not materializing, particularly on the bioscience side, and there should certainly be upsides. So we kind of guided in the middle of the different outcomes.

Dan Leonard – First Analysis

Okay, thank you. And then a question for Charlie, why would the tax rate increase in 2010?

Charles F. Wagner Jr.

Dan, it's really primarily driven by geographic mix of profits. We are generating more and more profits in the United States and that's driving the tax rate up slightly. Relative to the outlook we would've probably given last year, we had expected the tax rate to be increasing actually at an even greater rate. We were able to put some tax planning strategies into effect at the very tail end of 2009 that benefited us into 2010 and beyond. So though there is an increase year over year, it's not what we would've expected a year ago.

Dan Leonard – First Analysis

Okay, thank you.

Operator

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

Derik DeBruin - UBS

Hi, good afternoon. You're guiding to improvement in margins, you mentioned margin expansion in your prepared remarks in 2010, given that you're still investing in R&D probably north of 7% of sales, I guess where are the gains going to come from? Can you talk a little bit more about how you see the SG&A and the gross margins progressing throughout the year?

Martin D. Madaus

Yeah. There are certainly two areas where we see continued opportunity for leverage, one is the gross margin area and gross margin is combination of product mix. If you introduce more innovative more state of the art products you do have a favorable product mix effect. There's some pricing involved as well and some manufacturing efficiencies that we'll continue to drive. And we try to be a bit more efficient every year in SG&A and get more sales productivity out of our organization and those two factors contribute to it. Charlie, do you want to expand?

Charles F. Wagner Jr.

Yeah, Derik, one other thing. This year we pushed the working capital initiative pretty hard. That decreased volumes in some of our plants and also led to some inventory write-offs as we lowered the water level in inventory throughout the year. Though we'll continue to drive inventory levels down next year, the volume and the write-off impact is not as significant.

Derik DeBruin - UBS

Okay. And I guess I jumped on the call midway, can you talk about the interest expense outlook? I know you've paid down your revolver, where do you see that number coming in for 2010?

Charles F. Wagner Jr.

Derik, we didn't guide to that. Obviously it doesn't change too much. The outstanding debt is all fixed at this point and we're obviously not earning very much on our cash balances so if you look at kind of where we exited the year that should be a good indication of the run rate for the year, but we can take a look at it offline.

Derik DeBruin - UBS

Yeah that's fine. That's kind of what I assumed. Okay great, I'll get back in the queue. Thank you.

Operator

Your next question comes from the line of Tycho Peterson with JPMorgan.

Tycho Peterson – JPMorgan

Hey, good afternoon. Maybe just starting off with a question on R&D. If you can talk a little bit — I mean, you had kind of telegraphed increase in the back half of 2009 and as we think about kind of the level for 2010 can you talk a little bit maybe about how you're prioritizing between the two divisions and whether the bar's been bumped up for our run rate going forward here a little bit?

Martin D. Madaus

Well we are close to 7% so we are in the range of a little bit over 7% is probably a good run rate assumption for this year. In terms of prioritization between the two divisions, it's really driven by the competition of the best proposals. It really to me doesn't matter where. I mean, we have certain plans for each division, each business unit has their plans for innovation, and as we look at ideas we look at it across the board now and we fund the most promising ideas. We do separate out between what we call breakthrough innovation and sustaining innovation and that's an expression of balancing the risk a little bit here between a really risk project and a more safe bet so we want to do both.

But it's really both. The market opportunity for bioscience is larger for Millipore just because the market is a $30 billion market and we have a good business for this and there's much more to go. But there are also good opportunities in bioprocess to innovate. I mean, this is by far, for us, a most attractive business today and we'll continue to invest into it.

Tycho Peterson – JPMorgan

And in your comments you mentioned clinical diagnostics in the context of the Lab Water business, can you talk a little bit about how you view that opportunity overall? Is there more cross selling that you can bring into that market and then are there other emerging opportunities, either implied markets or other areas, that are getting more interesting?

Martin D. Madaus

I mean, we (inaudible) diagnostic market today throughout OEM units so we see a lot of that business. We sell Lab Water and it is a good market. We haven't yet decided to move into that market, but as you can imagine we see the market, we see the end markets, we have asset capabilities, but we don't have a compelling platform or sales force today so it would be a major move for us, but today not what we have. I wouldn't include it, I wouldn't exclude it.

Tycho Peterson – JPMorgan

Okay. And then one last one on Lab Water, can you talk a little bit about how you think about instruments going forward? You've talked about the replacement cycle I think being pushed out in the past, do you have visibility on where that market kind of starts to see some inflection and is that closely tied to new lab space being built out or how do you look at that?

Martin D. Madaus

Yeah it is. So that's why Lab Water instruments were tough last year because many of these pharma changes meant expansion for labs which did not happen really. We did benefit from expansions in Asia and very soon some of these countries, particularly China, will be the largest market for Lab Water. That is good so we're expanding there and we're expanding also with products. I would say that the trends are, I would say cautiously optimistic coming into Q1 2010. There's definitely improvement in the sales pipeline in Lab Water. That's why I think it's going to be a much better year this year for Lab Water. And then in development we have actually a number of projects that are very substantial improvements over what we have today. Maybe in some cases they could be game changing in how Lab Water is (inaudible) today. That's in development today.

Tycho Peterson – JPMorgan

Okay, thank you very much.

Operator

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

Marshall Urist – Morgan Stanley

Yeah hey, guys. Good afternoon. So I wanted to just get a little bit more detail on how you're thinking about bioprocess for 2010, particularly I mean I understand comps are more difficult, but could you give us just a little bit more color on how you're thinking about or what's sort of baked in for new approvals in 2010 and as well as some of the other, the applied markets and the small molecule pharma business?

Martin D. Madaus

Yeah. We never bake in approvals that aren't approved, so we basically say if there's a new approval coming in great. And I know there are a number of products that have a high change to be approved and in fact it could turn out that 2010 is a great year for new product approvals when you look at what we're seeing from Amgen and HGS, Pfizer certainly got approval and maybe AstraZeneca. But it's not wise for us to bake these in because we've seen these being delayed. When they come in and get approved there is upside certainly, but it's never good to count on it just like with a virus epidemic, we don't count on that. It's an upside, and at the same time you also have sometimes downside so drugs are not performing as planned. But it could be a strong year for biotech. I mean, it looks like it right now.

Marshall Urist – Morgan Stanley

Okay great, thanks. And then just one last one, I know you mentioned that SG&A could be a source of leverage this year. I guess it would be helpful if you just explained to us what are the areas that you're planning on investing in this year relative to 2009?

Martin D. Madaus

In SG&A?

Marshall Urist – Morgan Stanley

Yeah.

Martin D. Madaus

Okay yeah, continued expansion of our e-commerce channel. That will continue as that's our fastest growing channel, and that's more of a capability play. Continued expansion in certain Asian markets we have in China, Singapore, India, and in the I would say more established market is driving up productivity improvements which we always do so sales per person trend upwards. That's kind of the profile.

Charles F. Wagner Jr.

Yeah. We've recently launched a couple of initiatives taking some of the learnings and techniques from our success in the manufacturing environment with Lean 6 Sigma, applying those to G&A functions and looking to more systematically drive — we've been able to drive productivity improvements through careful management, we're now looking to drive those productivity improvements more systematically through programs and perhaps we'll update on that later in the year.

Marshall Urist – Morgan Stanley

Okay awesome. Thanks, guys.

Operator

Your next question comes from the line of Eric Kriskola (ph) with Thomas Weisel.

Eric Kriskola - Thomas Weisel

Good afternoon, just filling in for Peter tonight. So first question, since a lot of the large bio pharma like Pfizer-Wyeth have been largely consolidated, have you seen specific changes from those accounts being that they've done their restructuring and they've done all their cost cutting? Have those accounts changed in either way three to six months looking back and looking forward?

Martin D. Madaus

Yeah. They have changed in a way and we saw that change in 2009. They're basically putting a lot of projects on hold, not really cancellations. Or you had changes in people you talk to for sales organization in key account groups. And then recently we saw more activity in the form of RFT (ph), so for certain activities that were on hold or things that they would like us to consider for outsourcing, and that's where we see a bit of a change now in these large accounts. It varies a little bit by account so in some of these mergers we haven't seen much of a change, but others have been, I would say, more aggressive on cost reduction and there you saw obviously bigger changes.

Eric Kriskola - Thomas Weisel

And on the flu business, we've seen stories of governments like the UK trying to come back and trying to cancel orders that they've made around the H1N1 virus and I guess stockpiling issues there and less demand. Has that affected you in any meaningful way?

Martin D. Madaus

No it hasn't, not at all. I mean, we are counting on a wave of H1N1 production, but as I said there will be the resumption of regular flu which will be good and then some other vaccines coming in so it's not going to be a huge headwind for us at all.

Eric Kriskola - Thomas Weisel

Great, thanks a lot.

Operator

(Operator's Instructions) Your next question comes from the line of Jon Groberg with Macquarie Capital.

Jon Groberg – Macquarie Capital

Hey, congratulations particularly on the cash flow of specific emphasis for you this year so congratulations. Just I guess a lot of questions have been asked, maybe just a couple of data points I might be able to get. Did you say what in terms of pricing on a net basis you realized for both division in 2009 and do you have any expectations in 2010?

Martin D. Madaus

Pricing for us hasn't changed in the last year and there's always a slight positive variance, about 1%, maybe a little bit more per year net-net for both divisions. That's what you should factor in.

Jon Groberg – Macquarie Capital

Okay. And then you mentioned e-commerce, are you willing to give any metrics in terms of on the biosciences side what percent of your sales are coming from your e-commerce channel at this point?

Charles F. Wagner Jr.

Yeah. It is our fastest growing channel. We haven't published that. Overall for the company, e-business revenues are north of a quarter billion dollars, but we haven't broken it out specifically for the division. We may look at doing that over the course of this year.

Martin D. Madaus

Yeah if that's helpful we should probably do it because it's a major channel now and what's particularly encouraging is that we can connect so we are a bigger player, and particularly in research, we can connect with large systems now directly which is very good. So have a strong B2B connection plus the web store is very good to have transactions directly with our customers.

Jon Groberg – Macquarie Capital

Sorry, Charlie, did you give a number for the overall total business that you said that you were doing through that channel?

Charles F. Wagner Jr.

Yes, about $250 million.

Jon Groberg – Macquarie Capital

And does the bioprocess, do those customers buy through the Internet as well? I would think that maybe they would do a little bit less of it.

Martin D. Madaus

Yes, but the majority is bioscience, but some bioprocess as well.

Jon Groberg – Macquarie Capital

Okay. And then just last question as we think about the year, and I guess I might have written something down wrong, but I thought you had five fewer days in the fourth quarter, but I think you said you had six fewer days. It could've just been my mistake, but in 2010 are there any days issues in terms of the quarters that we're looking at as you go throughout the year?

Charles F. Wagner Jr.

No. I am very happy to report that in 2010 there will be no issues. I think Q1 will be a day shorter and Q4 will be a day longer, both of which are completely immaterial differences.

Jon Groberg – Macquarie Capital

Okay great. Thanks a million.

Operator

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

Derik DeBruin - UBS

Actually I was going to ask the days question so I'll get back, thanks.

Charles F. Wagner Jr.

Thanks.

Operator

At this time there are no further questions in queue. (Operator's Instructions).

Charles F. Wagner Jr.

Okay, operator. We are ready for our closing remarks.

Operator

Thank you. We have reached the allotted time for questions. I would now like to turn the call over to Martin Madaus for closing remarks.

Martin D. Madaus

Thank you for joining us this evening. 2009 was a successful year and we enter 2010 with great momentum and confidence. We hope to see many of you at the Barclay's Investor Conference in March and we invite you to visit us here at our offices in Billerica, Massachusetts. Thank you for your attention this evening and good night.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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Source: Millipore Q4 2009 Earnings Call Transcript
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