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Thermo Fisher Scientific, Inc. (TMO)

Q2 2007 Earnings Call

July 26, 2007 9:00 am ET

Executives

Kenneth Apicerno - VP, IR

Marijn Dekkers - President & CEO

Marc Casper - SVP

Peter Wilver - VP & CFO

Analysts

Derik De Bruin - UBS

Ross Muken - Deutsche Bank

Tycho Peterson - J.P. Morgan

Tony Butler - Lehman Brothers

Jon Groberg - Merrill Lynch

Quintin Lai - Robert W Baird

Paul Knight - Thomas Weisel Partners

John Sullivan - Leerink Swann

Presentation

Operator

Good morning ladies and gentlemen and welcome to the Thermo Fisher Scientific Second Quarter 2007 Earnings Conference Call. I would like to introduce our moderator for the call, Mr. Kenneth Apicerno, Vice President, Investor Relations. Mr. Apicerno you may begin the call.

Kenneth Apicerno

Good morning and thank you for joining us. On the call today we have Marijn Dekkers, our President and Chief Executive Officer; Marc Casper, Executive Vice President; and Pete Wilver, our Chief Financial Officer.

Please be aware that this call is being webcast live and will be archived on our website thermofisher.com until August 31, 2007. To reach the replay of the call on the website, click on Investors, then Webcast, then presentations.

Please also be aware that a copy of the press release setting forth our second quarter 2007 earnings and future expectations is available in the investor section of our website under the heading Quarterly Results.

We’d like to begin the call by reading the Safe Harbor statement. Various remarks that we may make about the company’s future expectations, plans, and prospects constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in the company’s Form 10-Q for the quarter ended March 31, 2007, under the caption Risk Factors which is on file with the Securities and Exchange Commission and available in the investor section of our website, under the heading SEC Filings.

We also may make forward-looking statements about the benefits of the merger of Thermo Electron and Fisher Scientific including statements about future financial on operating results. The new company's plans, objectives, expectations, and intentions and other statement that are not historical facts.

While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change, and therefore you should not rely on this forward-looking statements is representing our views as of any date subsequent till today.

During this call, we’ll be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. A reconciliation of the non-GAAP financial measures used on this call to the most directly comparable GAAP measures is available on the press release setting forth our second quarter 2007 earnings and future expectations and in the tables accompanying such releases in the Investors section of our website www.thermofisher.com under the heading Quarterly Results.

Related information is also available on the Investor section on our website under the heading Webcast and Presentations.

With that, I’d now like to turn the call over to Marijn.

Marijn Dekkers

Thank you, Ken. Good morning everyone. Thanks for joining us again on the call today. As you can see in our press release, we have had another record quarter and that means that we have a lot of good news to tell you about this morning.

We have now delivered three strong quarters as Thermo Fisher Scientific. And our results clearly show that we are successfully operating as a unified company.

Our primary end markets continue to be strong. We have a number of new products across our businesses that are in great demand and we have a culture of operating discipline that’s focused on continuously improving our business processes in order to best serve our customers.

All of these growth drivers are coming together to fuel our strong performance. The integration of Thermo and Fisher has gone exceedingly well; better than I could have imagined when we closed to merger, nine months ago.

I said at last quarter and I will say it again, I really, I’m extremely pleased with the way our employees embraced this merger and immediately started working together towards our goals as one company.

And it’s great to see that the collaboration is creating value for our shareholders, our customers, and of course also our employees. So let me quickly summarize the financial results. Q2 again, I’m only going to compare our revenues and adjusted operating results except for EPS with pro-forma 2006 as if Thermo and Fisher were combined for all of 2006.

And pro-forma our revenues grew 9% to a record $2.39 billion. Our adjusted EPS was also a record increasing 55% to $0.65. Adjusted operating income rose 25% and we also had another great quarter of adjusted operating margin expansion, up 220 basis points to 17%. We also continue to be on-track to deliver the $75 million of merger synergies this year, most of which are cost synergy.

So, all in all another very strong quarter resulting in a terrific first half of this year. Little bit of a market update of course, we continue to benefit from the fact that our primary end markets are healthy. And they were really no dramatic changes from what we have seen in the past few quarters.

Biotech has remain strong, big pharma continues to get better and both are driving strong sales of our analytical technologies and bioreagents used for life sciences research. Also outsourcing to our BioPharma Services business is growing in the double-digit. Clinical diagnostic markets are showing robust growth resulting in strong sales of our anatomical pathology products used for caner diagnosis and testing.

Academic and government markets continue to grow modestly and environmental regulations worldwide continue to drive demand for a range of our products from our portable X-ray instruments to our mercury monitoring system.

And lastly industrial markets remain strong creating demand for our process instruments used to optimize the global production of commodity material. On the new product front it was it was also a very productive quarter. Some of you attended ASMS in June, were we showcased a number of new integrated Mass Spectrometry solutions under our Thermo Scientific brand.

Customer response since then has been very positive and I'll mentioned a few highlights we introduced two new Orbitrap systems the XL and the discovery giving life science researches new alternatives for protein analysis. From more general applications to those that are highly offend.

Our new generations Triple Quad the TSQ Quantum offers more powerful analysis in regulated environmental food, toxicology, drug and clinical research applications. And then also our new SILAC reagent kit optimize our base line of bioreagents for use with our own Mass Spectrometer for more accurate results during protein analysis. In our biosciences business we also opened a new laboratory during the quarter to provide RNAi-based screening services that support drug discovery and development.

And this lab features in integrated platform of Thermo Scientific technologies, including our own siRNA and miRNA libraries, high content screening reagents and imaging instrumentation along with robotics and software to automate the workflow. By performing these services for our customers in-house on a contract basis or by transferring the workflow to their own facilities. We expect to accelerate customer’s option of revolutionary biosciences technologies such as RNAi.

Another thing I've noted in biosciences is that we, in the quarter launched a 1,000 leader single use bioreactor for cell-culture processing and this expense our product offering in bioprocess containers which saw a record growth in Q2 as BioPharma demand intensifies for safer and more efficient drug development and production tools.

Outside the laboratory, our customers are facing a host of new regulations around environmental and consumer safety issues. It is becoming more and more important for them to know exactly which elements are present in products they manufacture for consumers and we have a range of technologies to meet this need.

For example, we just launched the series of new Thermo Scientific portable elemental analyzers called the NITON XL3. And we've visited new product line we are meeting our customer's specific needs in alloy analysis compliance with electronic waste and as it in substance regulations, environmental testing, as well as mining and mineral explorations.

A quick word on acquisitions, with much of our growth comes from successful products we also continue to keep a close eye on opportunities for strategic acquisition. We are obviously well equipped to make acquisitions that will bring added value for our customers by extending our technology platform and our market reach.

For instance this morning we announced our agreement to acquire a company called Qualigens, which is $24 million division of Glaxo Smith Kline based in Mumbai, India. Qualigens is the leading supplier of laboratory chemicals in India. Giving us the leading position in that countries, research laboratory market.

Not only those as acquisition extend our commercial reach in India, but it's also very complimentary to our biosciences business and give those greater access to laboratory chemicals and reagents for the global market

Given the major push of the global pharmaceutical industry to conduct more research in India. The new acquisition of Qualigens strength our presence there and will help to accelerate our growth in this important market. A word on guidance, also our performance this quarter added up to a strong in first half. And based on this performance, we’re again raising our adjusted EPS guidance for 2007.

We now expect earnings to be in the range of 250 to 256 versus our estimates earlier of 243 to 253. And this increase would lead to 31 to 34% adjusted EPS growth over our strong results in 2006. We are now also raising our revenue guidance to a range of $9.50 to $9.55 billion over the 9.4 to 9.5 billion we previously announced. And this would result in a 7 to 8% growth in total of the revenues for 2007. So with that, I would like now to turn over the call to our CFO, Peter Wilver, for more details on our financial. Pete?

Peter Wilver

Thanks Marijn. Good morning everyone, as we did last quarter to provide better year-over-year comparisons, the revenue and adjusted operating income numbers, as well as, the working capital metric that I’ll discuss with you today will be presented on a pro forma adjusted basis as if Thermo and Fisher had been combined in all of 2006.

Comparisons of below the line items such as interest, taxes, share account, and earnings per share will be discussed on an adjusted basis as reported. As Marijn said, our adjusted earnings per share for the quarter grew 55% or $0.65 compared to $0.42 in Q2 last year. We exceeded Wall Street consensus earnings by $0.05 in the quarter $0.01 of which was a result of our lower tax rate. As I discussed on our Q1 call, the calendarization of our earnings has changed as the result for the merger, and part driven by the increase in consumables as a percent of our total revenue.

Regardless, we are pleased with our Q2 results, and have increased our full year earnings guidance to reflect our strong first half performance, and higher confidence in achieving our second half goals. I’ll cover our revised guidance in more detail at the end of the call. GAAP earnings per share in Q2 were $0.37, up from $0.29 in the prior years quarter, primarily as a result of increased earnings from the merger, and improved operating performance, partially offset by higher acquisition intangible and amortization. Our press release contains a detailed reconciliation between GAAP and adjusted EPS.

Operator it appears that someone on the line has their microphone turned on, other than us.

Operator

You have the only live line, sir.

Peter Wilver

Okay. We are getting some background noise. Revenues in Q1 increased 9% year-over-year to 2.39 billion. Organic revenues in the quarter were up 6% excluding non-merger related acquisitions and divestitures, and favorable currency translation of 2%. Bookings slightly exceeded revenues this quarter, by just over 1%. In the Analytical Technologies segment, revenues rose 13% on a reported basis and 8% organically.

In the quarter, we saw a strong growth across all our major markets including life sciences, diagnostic and industrial. In addition, to the market strength our new product introductions also continued to be a key growth driver, specifically in our mass spectrometry, elemental analysis and environmental product lines.

In the Laboratory Products and Services segment, revenues for the quarter increased 6% on our reported basis and 4% organically. We saw growth across all of our major market segments with particular strength in BioPharma. By region, we saw organic growth across all our major regions. North America grew organically at slightly below the company average and Europe, and Asia Pacific grew slightly above the company average. The rest of the world grew over 10% from a relatively small base.

Moving on to adjusted operating income; Q2 adjusted operating income increased 25% year-over-year to 405 million. Adjusted operating margin was 17%, up 220 basis points from 14.8% in the year ago quarter on a pro forma basis.

Stock compensation expense was 12 million in Q2, as compare to 18million in the prior year on a pro forma basis, which contributed 20 basis points to the year-over-year margin expansion in the quarter. The balance of the margin expansion came from all through on our organic incremental revenues and in the impact of our integration, sourcing and productivity initiatives. Analytical Technologies Q2 adjusted operating income it increased by 32% year-over-year, and adjusted operating margin was 19.8%, up 280 basis points versus 17% last year.

Laboratory Product and Services, Q2 adjusted operating income, increased by 18%, and adjusted operating margin increased by 140 basis points to 13.9%, as compared to 12.5% in the prior year.

For the whole company, adjusting gross margin was 41% in Q2, up 120 basis points from 39.8% in the year ago quarter. Primarily as a result of price increases net of inflation, some favorable mix related acquisitions, volume leverage and the impact of our sourcing and productivity initiatives. Adjusted SG&A was 21.6% of revenue in Q2, down 80 basis points from 22.4% in the year ago quarter. Primarily as a result of volume leverage integration synergies and lower stock compensation expense. Partially offset by some favorable one-time at history in the previous years quarter. On a year to date basis SG&A, as the percentage of revenue is favorable by a 120 basis points versus last year.

We have taken a lot of synergy related cost out of the business in the first half of the year and we expect to reinvest some of those savings in the second half for the year to drive long-term growth. So you can say that there was somewhat over synergies at this point. R&D expense was 2.5% of revenue in Q2, down 10 basis points from 2.6% in the year ago quarter. Analytical technologies R&D expense was 4.8% of revenue down 40 basis points from the prior year.

Moving to below line items adjusted net interest expense was $23 million in Q2 up $18 million from the prior years reported. Primarily as result of merger, other income of $2 million was up $1milllion from the prior year.

Our adjusted tax rate was 24.2% in Q2, down from 30.6% last year for Thermo standalone and also down from our previous full year forecast to 25%. During the quarter we continue to put forward significant effort in this area, and we're successful on implementing some additional tax planning, that lowered our tax rate forecast for the year to 24.6%.

Average diluted shares were 446 million for the quarter, up significantly from the prior year as result of the merger. We continue to expect full year average diluted shares to be in a range of 440 million to 445 million in 2007. In terms of balance sheet performance we ended the quarter with $974 million in cash and in investment, up $283 million from Q1 primarily as a result of strong operating cash flow and option proceeds.

Partially offset by paying down our short-term debt. Our debt decrease by $147 million from Q1 $2.2 billion as a result of paying down short-term debt. Receivables day sales outstanding was 54 days flat with the prior year on the pro forma basis. Inventory days of supply was 76 days also flat with the prior year on a pro forma basis if you exclude the four day increase that resulted from the purchase accounting inventory step up.

Q2 year-to-date cash flow from continuing ops was $558 million. After deducting net capital expenditures of $58 million Q2, year-to-date free cash flow from continuing operations was $500 million. For 2007 we now expect free cash flow from continuing operations to be in the range of $1 billion net of merger related cash out flows.

So, let me just review with you the guidance’s that we’ve in our press release. We're increasing our adjusted EPS guidance's to $2.50 to $2.56 as compared to our previous guidance’s of $243 to $253. Primarily as a result of our solid first half operating performance and a slightly lower tax rate.

This range -- represents 31% to 34 % growth over our 2006 adjusted EPS of a $91. We're also increasing our fully year revenue guidance’s to $9.50 to $9.55 billion as compared to our previous guidance's of $9.4 to $9.5 billion as a result of more favorable fund exchange translation. This range represents to 7% to 8% increase over our pro forma 2006 revenues of $8.87 billion.

Finally, our integration project continued to progress well and a good number of them have already been completed. So we remained confident that we will achieve $75 million of synergies in 2007. So in summary, that was another excellent quarter for us in terms of growth and operational performance. We are pleased with the results and believe that we are positioned well to meet our goals in 2007.

Kenneth Apicerno

Okay with that we move up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Derik De Bruin from UBS.

Derik De Bruin - UBS

Hi, good morning.

Marijn Dekkers

Good morning Derik

Peter Wilver

Hi, Derik

Derik De Bruin - UBS

So I am going to ask you guys the, two most frequently asked questions that I guess. The first one is, that were obviously consolidating industry there is diagnostic companies is following by the website everyday and things going on all around us. I keep getting to ask, what you guys are going to do, in terms of M&A being -- I know your comment is mostly analytical technologies, give a little bit more color in terms of what you're think on M&A front?

Marijn Dekkers

Okay.

Derik De Bruin - UBS

Quickly more long line to sizable deal.

Marijn Dekkers

Sizable deal. Well we just, did a quite of sizable deal in November, right though and we can feel that, we are actually at the forefront of during sizable deals in our industry having just put this mergers together. And we're now, well this is our third quarter that we’ve reporting as one company and you can hear that we are quite confident that we are on the right track. So I get the question I love to Derik, what’s next and does the integration of Thermo and Fisher prevent you from doing other bigger deal in the near future.

And its sort of the answer is really, it doesn’t prevent us from doing bigger deal in the future, because from a management capacity point of view some of our divisions are really not that affected by an extra work load as a result of the Fisher integration.

For into scientific instrument, where we have must taken a chromatography and elemental and molecular analysts is a division, there was one of the key divisions in the legacy Thermo, it’s not a key division in our combined company. And it’s really not that affected by, from a management point of view by the merger with Fisher.

And other divisions like laboratory equipment are very effective by and the acquisitions and the mergers, we’ve done over the last two years. And they really need to have management focused on the implementation of the strategy and the integration.

So in theory it’s a little good but I would say that in general and in the buyer restrains area, scientific, instrument and diagnostic, we can take on a good size acquisition if the right opportunity would come along.

Derik De Bruin - UBS

Okay, that’s helpful. I mean the other question I get is always on the lines of, which is you know, everybody on the buy side have or every one on the sale side has a buy stock -- obviously sale side is not that bright sometimes what we missing about it I guess what can potentially go wrong with that, what keeps you awake at night?

Marijn Dekkers

I don’t think there is much that can go wrong here, quite honestly because -- it is a business with 54% consumable, 16% services and software and so two third of our business is a relatively stable stream of demand, of course capital cycles are what they are, on the other hand 66% of our customer base is in life science and healthcare.

So I think from a market exposure point of view and a product line particularly to the high content of consumables. We are at pretty low risk enterprise. So that’s not keeping me awake at night.

What I think a lot of about is we -- how do we truly, competitively leverage all these capabilities that we now have in the company in the most optimum way, rather than we got in this, the tremendous number of great asset, technologies, market reach through the channel, through the catalogue and all in one company now is just phenomenal in terms of its capability.

How do we optimally take advantage of that? We’re going to take advantage of it but how do we optimally take advantage of it comparatively. That’s something that we give a lot of thought to and -- our success and thinking through that will to some extent determine our success two, three four years out. But this is not a down scenario, this is more of, how good can be upside scenario be.

Derik De Bruin - UBS

Great, thanks. I’ll get back in Queue.

Marijn Dekkers

Okay. Thank you.

Operator

Your next question comes from Ross Muken with Deutsche Bank.

Ross Muken - Deutsche Bank

Good morning, gentlemen.

Marijn Dekkers

Good morning, Ross.

Ross Muken - Deutsche Bank

You know that sort of strength across all markets, but I want to -- sort to focusing on, I wonder to. In terms of, the pharmaceutical strength you are seeing and this was noted by another competitor of yours as well.

Do you think this is sort of a recovery from the bottom where we are getting back just sort of more normalized growth level, or do you believe we’re actually coming to a point, where pharma might be reaccelerating again to the degree where we could get back to more of a traditional growth rate from that market longer term?

So, it’s a really question to sort of the sustainability of this recovery, and do we sort of come back and then flatten of or do we comeback and hopefully continue to grow?

Peter Wilver

No, Ross this is Marijn, I don’t -- I think its been a very gradual recovery so far. Obviously, very early on 2005 it was a disaster we remember that, and then ‘06 let me start to getting better in the second half of ’05 or ’06 got better again, ’07 is better again. But this is not in my mind and inflection point to the good old day. That may come next year.

I actually think that when you are listing two pharma companies then they are confident that the some of the issues will be behind then within the next 12 to 18 months and that the companies will be operating more in a historical type of investments scheme from an R&D point of view. But I don’t recognize what we are seeing in terms of strength of Pharma and all of a sudden inflection point with an arrow pointing up all the way to the sky, not yet.

Ross Muken - Deutsche Bank Securities

And could you also -- you touched upon the acquisitions bay in India, and currently you guys have done a very good job of being early in many of the emerging markets. Can you talk to us about in India, but more specifically in China what we’re seeing from sort of a capital equipment investment trend line and can you talk about sort of the sustainability, the growth there.

I mean is there any sort of wavering in demand in that market? And given the strength of the Chinese economy, going into the Olympics, is there any opportunity potentially that we could see obviously a up tick in ’08 versus even the strong ’06 and ’07?

Marijn Dekkers

Ross, we’ll let Marc Casper answer that question. Okay?

Marc Casper

Good morning, Ross. In terms of China, an analytical instrument demand, it continues to be very strong. Mass Spectrometry, life science and industrial applications, food safety market continues to be strong and accelerating. The traditional strength of that, ten years elemental analysis of all varieties for infrastructure, as well as consumer product base safety applications has been incredibly strong.

And I actually believe that those types of products will continue to see good growth because of safety concerns. All of the scares that we read about in the paper really does reflect well on these types of products that we make. So, I think we’ll see good demand. I think infrastructure for the Olympics is probably at the end of that part of the cycle, given how close for this now.

But we’re seeing accelerating demand on instrumentation in China. In India, obviously it looks encouraging as well with the move towards more pharmaceutical outsourcing to the Indian market and that’s obviously very good for our Mass Spectrometry business as well.

Ross Muken - Deutsche Bank Securities

I know we are supposed to keep it to two questions. I have a quick third one Just based on what Derek said sparks something for me. What do you make of what GE and Siemens and Roche are doing from sort of an acquisition standpoint in the diagnostics space?

I mean you have internally within you, as you had mentioned it out in chemical pathology business, similar to Ventana and immunohistochemistry and a bunch of other diagnostic assets you got from ABgene. What do you think their strategy is? What is it due to competition and what do you think about the valuations paid for those assets relative to the intrinsic value in your business.

Marijn Dekkers

Well, it’s true. It’s a complicated question particularly because the intent obviously was for the two-two merger, then they decide not to do it. So, you can talk from both sides of the argument.

Marc Casper

And I think I’m not an expert. I don’t know GE what said in two years, but it makes sense for them to have a similar strategy to Siemens, which is to have a broader diagnostics platform and have imaging and clinical chemistry together in one company. In the end when you walk into a hospital you have an imaging department and you have a clinical chemistry laboratory and overtime these two will be more integrated.

So I can understand that’s from a covering the customer based point of view. We at Thermo Fisher are doing the same thing in research laboratories. We say we like to have complimentary technology because in the end we will put a better-integrated workflow together than only just sell single individual technologies to the customer.

So, I can see the -- of all that and the fact that it sells through, I really don’t have any inside information on why that happened, but the strategy and principle makes sense to me. In terms of what’s being fate for these assets, I don’t understand why people are paying the prices they’re paying for these assets, because life sciences healthcare, if you are running a company, you know the market will always be there, and it will fairly stable on people getting older -- we want all -- we all will invent a medicine and hence, to be a provider to a life sciences and healthcare markets is a very good place to be.

So if you’re GE or Siemens and you have all these choices that you can make of which different markets to participate in, I think this is one of the best. So I can understand that they are willing to pay up to a kind of bigger presence in it.

Ross Muken - Deutsche Bank Securities

Great. Thank you very much, guys.

Operator

Our next question comes from Tycho Peterson with J.P. Morgan.

Tycho Peterson - J.P. Morgan

Good morning.

Marc Casper

Good morning

Marijn Dekkers

Good morning, Tycho.

Tycho Peterson - J.P. Morgan

Marijn, I want you to follow up a little bit on some of your commentary around the biosciences service business, and you talked about some of the cash creating services you’re offering. I guess can you just kind of give us a sense in terms of some of these expanded service offerings, what the direction anyhow this business model could take?

I mean obviously, you’re not going to go down path of being a full fledged CRO, but this certainly, given your breadth of expertise, a lot of areas you could go in. How broadly are you looking at building up a service business and what other areas could you potentially get into?

Marijn Dekkers

That’s an interesting question because the funniest thing as if, you are sitting on a really exciting new technologies like RNAi, it is just unbelievable in terms of its potential. And you’ll find that the customers are not experts in, how to apply this technology.

So, its one thing to then demonstrated in your own laboratory and show them how to use RNAi, its another thing to demonstrate. Wait a minute, if you want us to do that work for you, we can do that as well, and we have the capability and capacity to do that. So it’s for us a little bit of a different model now where we are staying, we are not just out to sell you RNAi and demonstrate to you and our demo let, how to use it.

But if you want us to do that experiment for you, in this very-very complicated new technology, we’ll do it, maybe we’ll only do it for half a year and then we transition this technology and the workflow and the instrumentation and the consumables to them in their own lab.

Once they are comfortable with the concept. So, it’s sort of an extension of a demonstration laboratory capability that is a service to the customer. And I think we will see more of that in the future because it a very good way to drive adaptation of the new technology with the customer base that’s not really use to it.

Tycho Peterson - JP Morgan

Okay. And then secondly on the manufacturing side of things you talked about the disposable manufacturing container and it’s been a while since we had enough data on how you’re manufacturing businesses.

Can you just remind us, how large that business is today and I think going back my memories for bio which historically is skewed more towards the research market on the media side, is that correct? And maybe you can talk to some other trends around trends around serum-free and animal-origin-free, what direction you are hoping to take that business?

Marijn Dekkers

Yeah. Well we have, as a result of Fisher’s for a bio acquisition and with product lines Hyclone for instance. And also, another the price of Fisher’s with NALGENE and NUNC more on the bioprocess container side, both product line.

We have quiet a nice position in bioprocess and production support, and it goes as you say, it goes from serum, media to also the container, the bags in which the cell reactions are taking place, containers.

Its growing very rapidly because our biotechnology customers want to get away from steel tanks, and of a lot of regulations coming with them in terms of cleaning, and procedures and disposable reactors are really preferred lot of cost saving and lot of ease of use there.

So resting have very good growth trend in media and bioprocess containers driven by the ease of use for the biotech customer.

And then your comments on serum versus media, everybody knows that overtime animals containing serum is kind of grow less than the media. We have a position in both of these product lines and this is I think a very-very gradual transition overtime that, we’re playing both sides of.

Tycho Peterson - JP Morgan

Okay, great thank you very much.

Marijn Dekkers

Okay thanks Tycho.

Operator

Out next question comes from Tony Butler from Lehman Brothers.

Tony Butler - Lehman Brothers

Yes. Thank you. Excuse me; you alluded to the to NITON XL. And I’m curious, is if fact it’s true to be XRF analyzers, maybe this, one of the fastest growing products of Thermo.

If that’s true, could you provide, what of those instruments actually cost and the reason of I’m asking is because is it possible that customers even though an advantages that are portable, but is it possible that customers actually could purchase one of those instruments, which tend to be perhaps cheaper than one of the larger instruments or either a mass aspect.

And therefore would that eliminate, potentially eliminate the purchase of a larger or several larger instruments? Thanks.

Marijn Dekkers

Well. For you Tony, we can get you a very good price on one of those portable analyzers.

Tony Butler - Lehman Brothers

Yes, discount. Thanks.

Marijn Dekkers

Yes. We never do that for anybody else. But they are in the range of 25,000 to 30,000 to 35,000 something that’s very high and maybe a little higher. And basically these are analyzers that you can, its almost like a hair blowers, its like you hold it against the surface and it will tell you almost in sententiously what elements, what metals in particular are in that surface, in the specimen, in very high accuracy. So you can find out whether area is let in paint or whether are not. We could even go a restaurant and point it out at the fish you ordered and see, thus mercury in the fish.

That, how precise these instrument are? They are not really replacing mass spec because our large laboratory instrument because those are very often used for even more precise, and high throughput type of experiments like in a lot of quality lab they have an elemental analyzer, and they’re going to do 4000 samples a day, high throughput all kinds of quality samples from all over the place.

Its going to be impossible to go and put a gun like that, portable analyzer again for all of these 4000 samples. So, it is a little bit of a different application, but the important part is that its an application now, where in the field people get immediate feedback of what, substances are in the sample that they are looking at, which is very important for environmental applications, Homeland Security Safety application like its lead in paint take sample.

In France there is legislation that you cannot paint over paint that has lead in it, so if a painter comes in to your house, so you need to know whether or not the existing paint layer has lead in it. Well, if you have to scrape up a of piece of paint, send it to a lab and get the result, two days later that’s pretty inconvenience for that French painter. Now they’ve put that portable X-ray analyzer then they get an instantaneous result.

So those type of markets we’ve now sort of -- are now able to address that really didn’t exist before and you’re right, its one of our fastest growing product line.

Tony Butler - Lehman Brothers

Thanks very much Marijin.

Marijn Dekkers

Hey, thanks Tony.

Operator

Our next question comes from Jon Groberg from Merrill Lynch.

Jon Groberg - Merrill Lynch

Hi, good morning. Congratulations on a fantastic quarter.

Marijn Dekkers

Thank you, John.

Peter Wilver

Thanks.

Jon Groberg - Merrill Lynch

I just want to spend a little more time on the 60% your business on the lab products and services. Can you just, I know a large portion of that is more based in the U.S. so the 6% number? Can you just give me a sense as to organically, what that number was as far as growth this quarter?

Peter Wilver

Organically in laboratory product and services, that was 4%.

Jon Groberg - Merrill Lynch

4%?

Peter Wilver

Yeah.

Jon Groberg - Merrill Lynch

Okay. And can you spread a little more color, the margin expansion there was phenomenal at 13.9%. Can you just maybe break out; I know you mentioned integration, procurement sourcing and a productivity enchancement. So, if you can give a little more color as to what -- if you can break out individually, what each contributed?

Peter Wilver

We really don’t give the detailed analysis of what the margin expansion is. It’s pretty balanced between those elements. We focused on price obviously that’s a little bit offset by inflation. Certainly, the organic growth brings through at a -- closed to a gross margin pull through. And then, certainly we have productivity, and integration initiatives that impact both segments, as well as, the corporate expenses.

Jon Groberg - Merrill Lynch

Pretty balanced I guess with the...

Peter Wilver

Yeah, I would say one quarter and other might shipped a little bit, but it’s reasonably balance in terms of the contribution to the margin expansion.

Jon Groberg - Merrill Lynch

Okay. And then, may be either -- you made this comment but you and Marijin can discuss. You mentioned North America was a little weaker at least relative to the company average.

You have more exposure to the lab product services, but may be expand a little more as to what you’re seeing in North America, and maybe why it’s going a little below the company average in your view?

Marijn Dekkers

Yeah. This is Marijn. North America was very strong last year, and Europe was just beginning to recover last year. And I think you see somewhat in the general economy that particularly Europe is now little stronger than -- a stronger momentum than the U.S.

And then Asia is going quite steady at very good rate. But I think we see an overall reflection of little bit of the economy there where Europe is growing somewhat faster than U.S. at this point.

Jon Groberg - Merrill Lynch

Okay. So it's sound just accomplish, or is needed to build on little of our academic and government, I think you mention -- still kind of more meager growth that you feeling, is there anything is going to changes there or that environment still stays the same?

Marijn Dekkers

No, I mean I think the NIH budget is what it is, that’s probably will grow another 1% or 2%. So you know it is what it is. You know what we often forget and as I said this a few time, you cannot just focus on the NIH budget when you think about academic or government spending particularly academic.

Because we benefit a lot from donations and in Life Science’s areas, their people donating $10 million - $20 million and new labs gets build for Cancer Research or whatever and those -- part of that money flows to us as well.

And nobody is really keeping track of that, but it I think does help the overall academic spending.

Jon Groberg - Merrill Lynch

But you -- one smaller company yesterday, thought that they felt like maybe government was in academic, where some of the per stings are being loose in the little bit necessarily seeing any change there from a larger, a broader prospective.

Marijn Dekkers

No. It’s very high for us to break that all down with ultimate precision acquire.

Jon Groberg - Merrill Lynch

Al right. For your better prospect hence for that?

Marijn Dekkers

Yeah.

Jon Groberg - Merrill Lynch

Thanks.

Marijn Dekkers

Okay. Thank John.

Jon Groberg - Merrill Lynch

Thank you.

Operator

Our next question comes from Quintin Lai with Robert W Baird.

Quintin Lai - Robert W Baird

Hi. Good morning.

Marijn Dekkers

Good morning.

Quintin Lai - Robert W Baird

Mike, congratulations on the nice quarter.

Marijn Dekkers

Thank you.

Quintin Lai - Robert W Baird

With respect to the China and India, then so much talk about that being one of the faster growing geographies, so much competition is going over there. How do you view yourself is?

Marijn Dekkers

Okay.

Quintin Lai - Robert W Baird

To maintain in that competitive advanced, glowing faster in the markets there, is it through moves like the acquisitions that you made, and just making sure that you have an established position there or can new companies come in there and still take share?

Marijn Dekkers

Well, I think in those countries, scale is important, anybody can sell something in Boston or San Jose any small company can, but the ability particularly I am talking of western base company European or the U.S., to go and drive revenue growth in China or a place like India, you really have to have a significant support structure in play.

Not just about the sale of something, but also deserve the support -- the demo labs even local manufacturing. So I thing part of the reason we are seeing lot of consolidation smaller companies being bought up by larger company’s is the market as become so global that it become hard to a smaller company’s to service – you know the far away market.

And therefore – you know is like an acquisition Qualigens for us in India make us bigger in India -- first of all it’s a good company but it give us scale more present and as a results of that more people on the ground, more assets, more customer connectivity and I think, overtime that helps particularly in emerging you know higher growth areas like China and India.

And that’s why we have traditionally particularly with China, but also with India and years ago, I’m talk three, four years ago good quite a lot of investment in the ground. And for that reason, didn’t payout in the first week -- but we're just paying out now.

Quintin Lai - Robert W Baird

Thank you. And then Pete just a repeat. That did you say that you expect for the full year tax rate of about 24.6%?

Peter Wilver

That’s Correct.

Quintin Lai - Robert W Baird

And so, is that reasonable then to take that forward.

Peter Wilver

Yes.

Quintin Lai - Robert W Baird

All right. And any update on the vitality index.

Peter Wilver

It’s around 23% year to date.

Quintin Lai - Robert W Baird

All Right. Thank you.

Operator

Our next question comes from Paul Knight with Thomas Weisel.

Paul Knight - Thomas Weisel Partners

I lost to get into queue quick contest, didn’t I Marijn. A peak what are you – where are we with operating margins with the combined organization so, thermal when the past whatever Q3 that was you know ops margins and Q3 would be down. What do we have for margins in second half now?

Marijn Dekkers

Well, you know, obviously, as I said in the beginning of the call that the variations quarter-to-quarter is little bit dampened. But I would save for the second half we still have an impact – relatively soft Q3 because of Europe and then a rebound in Q4, but just not as pronounced that it use to be just for standalone Thermo. Both put in the top-line as well as margins.

Paul Knight - Thomas Weisel Partners

Okay. And Marijn you were selling some service companies I think seven years ago, now you don’t seem to be interested in doing that you wanted to be in it, right? I mean what’s going on now versus then that you want to be a service firm as well?

Marijn Dekkers

Well, which company are you referring to, Lancaster Labs?

Paul Knight - Thomas Weisel Partners

Yeah.

Marijn Dekkers

That wasn’t me. At that time, Thermo needed to focus on core, these seven years ago when we were 24 public companies. And we decided to just focus on instruments, we then – when we recognized our huge installed base started driving surface support for our customers more and more because quite honestly we would have instrumentation or equipment that we don’t even offer our customers of service contract in the original quote when we were selling something that’s been those days. So we have been since then focused on service.

I think that does Fisher had a much broader service model and driven by an initially the catalog business and been still close to the customers in the laboratories and seeing what they were struggling with so Fisher really picked up for instance the support in clinical trials particularly from, the packaging point of view. So they’ve picked up some very good services businesses that we are now very intend on growing and those are doing very well.

Paul Knight - Thomas Weisel

Okay. And lastly are you, back to the first question are you saying that we should build in sequential declining our margin and revenue for Q3?

Marc Casper

I am not going to direct you what to put in your model, but just on a relative basis I was saying that Q3 is still a weaker quarter and Q4 is a stronger quarter even for the combined company.

Paul Knight - Thomas Weisel

Yes, Okay. Thanks.

Marijn Dekkers

Thank you Paul.

Operator

Our next question comes from John Sullivan with Leerink Swann

John Sullivan - Leerink Swann

Hey, guys good morning.

Marijn Dekkers

Good morning John.

John Sullivan - Leerink Swann

Couple of quick questions can you just post us on pressures on the material side of the business you would talked in the past of having good pricing power, but needing good pricing power in some businesses because materials prices continued to pressure you, can you just post us on that?

Marc Casper

Yes, John it’s a very important question because we feel more and more pressure particularly on the metal sides steel, copper, nickel very expensive, so we are clearly seeing inflationary pressures in products that’s use a lot of metal.

Fortunately we’ve always been very focused on pricing as well so we’re trying to pass that on as best as we can, but the inflation but the inflation and pressures is quiet significant. Interestingly, more so on the metals than it is on oil based products, so we see some inflationary pressure on things like plastics, as well, which obviously we use for the consumables the laboratory consumables business, and but less sold than metal.

John Sullivan - Leerink Swann

Appreciate that. And then did you, I think in the past I’ve talked about your natural hedge so that’s in your business from your business which customers that are positively correlated with commodity prices minding an energy alike, can you remind us what percentage of your revenues come from those type of customers?

Peter Wilver

Its was pretty low now it was I’d say about 10% in legacy turnover and is less than 5% now, so still they’re doing very well and we liked our business so there’s somewhat of the hedge effect, that does not I think as it used to be.

John Sullivan - Leerink Swann

I understand. And lastly if you don’t mind, you talked in last quarter about the coal plant mercury monitoring opportunity that you see, can you just, is there any update on that? And then can you just help us on think about how an opportunity like that might find its way into other markets? Does it have to happen by regulation in other markets or does it happen by through other means? And can you comment on, what that might be?

Marijn Dekkers

Yes, this is the mercury continues monitoring system that you are talking about, every coal fired power plant in the United States needs to monitor its mercury emission, by January 1st 2009, okay. So we are one of two companies that has been approved by the EPA to sell these systems to the coal-fired power plants. And we have a beautiful system and the demand is really phenomenal for it. We’re doing very well. Nice growth. But it’s sort of a -- it’s a single market.

After 2009, in the United States, people aren’t going to install these things anymore. They’ll service -- they need to service for them, but not the original equipment. And this only translates when this type of legislature would be implemented in Europe or in China or Russia or somewhere else. So this is really legislation driven.

John Sullivan - Leerink Swann

Thanks very much.

Marijn Dekkers

Thanks, John.

Operator

(Operator Instructions)

Marijn Dekkers

We have time probably for just one quick question.

Operator

I am not showing any other question, Sir.

Marijn Dekkers

Okay. Well, let me wrap up the call then. Thank you very much everybody for being on the call. I think you can see that with our excellent performance we are showing that we’ve stuck successfully, come together as one company now, Thermo Fisher Scientific.

And we plan to build on this strong foundation. By really leveraging all of the capabilities we have to better serve our customers. And we really look forward to updating you on our progress. So thank you, again and thanks for your support.

Marc Casper

Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the conference. You may now disconnect. Good day.

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Source: Thermo Fisher Scientific Q2 2007 Earnings Call Transcript
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