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Executives

Kenneth Apicerno - VP, IR

Marijn Dekkers - President and CEO

Marc Casper - SVP

Pete Wilver - VP & CFO

Analysts

Paul Knight - Thomas Weisel Partners

Ross Muken - Deutsche Bank

Derik De Bruin - UBS

Quintin Lai - Robert W. Baird

Tony Butler - Lehman Brothers

Tycho Peterson - JP Morgan

Jon Groberg - Merrill Lynch

Jon Wood - Bank of America

Thermo Fisher Scientific, Inc. (TMO) Q3 2007 Earnings Call October 25, 2007 9:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific Third 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 November 23, 2007. To reach the replay of the call on our website, click on "investors," then "webcast," then "presentations."

Please also be aware that a copy of the press release setting forth our third 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 provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors including those discussed in the company’s Form 10-Q for the quarter ended June 30, 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 impacts 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 these forward-looking statements as representing our views as of any date subsequent to today.

Also 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 third 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

Thanks, Ken. Good morning to all of you listening in. Thanks for joining us. We have very good news to report to you again this quarter. As you can saw in the press release, we had record third quarter financial performance.

We are about two weeks away from the one year anniversary of the Thermo Fisher merger, and the success of our integration can be seen in our strong operating results. The business is doing well; our key end markets are healthy, and we have the resources to invest in internal initiatives as well as acquisitions that will lead to future growth.

Let me get right to the Q3 highlights. As I have done earlier, I’m going to compare our revenues and adjusted operating results except for EPS on a pro forma basis, as if Thermo and Fisher were combined for all of 2006.

So revenues grew 7% to a record 2.4 billion. Adjusted EPS was also a record for the quarter, increasing 48% to $0.65. Adjusted operating income rose 17%. We also had an excellent quarter of adjusted operating margin expansion, up 150 basis points to 16.9%, and there are several reasons for our consistent margin improvement.

First, we are fully leveraging our top line growth including driving price. Second, we’re on track delivering the synergies from the merger with Fisher. And as you know, in 2007 most of those are cost synergies. Third, we continuously improve our productivity through our company-wide Practical Process Improvement program called PPI, which has now been rolled out in all of the legacy Fisher businesses. And then fourth, another contributor to our margin expansion is that we have undertaken an initiative across the company to discontinue low or no profit product lines.

With our gross portfolio, there are some unattractive product lines and rationalizing those gives us an opportunity to be more focused on our strong products. This obviously improves our margins even though it creates some headwinds for revenue growth.

So let me give you a brief update on our primary markets. Again no significant change from what we saw in the first half of the year. Our general end markets remain healthy, biotech still strong, big pharma is stable with spending levels similar to what we’ve seen so far this year.

BioPharma outsourcing services is experiencing double-digit growth. Clinical diagnostics is growing well. Academic is growing at average levels. Government is declining, and environmental sees very strong growth, especially in air quality in the United States. And then the question I get to be asked a lot. We still see no signs of weakness in the global commodities markets.

Let me comment a little bit on acquisitions. We continue to strengthen our presence by making acquisitions that compliment on our existing capabilities. As we stated in the press release, since August we’ve completed acquisitions totaling nearly $200 million in annualized revenues.

The life laboratory and health sciences industry remains highly fragmented, and that gives us opportunities to create value by acquiring businesses that offer global expansion, or new commercial capabilities, or complementary technologies, or any combination of these factors.

So let me give you some highlights of our recent activity. First, Qualigens, this acquisition closed in September, and Qualigens is the largest laboratory chemical supplier in India formerly owned by GlaxoSmithKline. Qualigens is now part of our customer channel business for research markets, and it significantly expands our laboratory, chemicals offerings and our customer base in a high growth Asian market.

Secondly, in early September, we acquired the instrument sales business of Davis Inotek. Davis is also being integrated into our customer channels business and broadens our portfolio with a range of specialty instruments and consumables for research and industrial process application.

Thirdly, Priority Solutions, which closed in early October. Now this one is exciting because it strengthens the outsourcing services that we can offer our biotech and big pharma customers for clinical trials management. Priority Solutions has a great logistics infrastructure that we can use to deliver clinical trial supplies to the patients participating in those clinical trials.

Fourthly, a good example of a technology acquisition is NanoDrop, which we just completed a couple of weeks ago. NanoDrop expands our UV-vis portfolio with instrumentation that can analyze micro volume samples. This is important because life sciences research that involves measuring DNA and proteins require scientists to work with very small samples, and that makes sample preparation difficult.

NanoDrop specific technologies allow our customers to easily analyze micro samples without having to dilute them, leading to better results and greater lab productivity. So, quite a few of these bolt-on acquisitions materialized recently, and I am not saying we are going to keep up this space of acquisitions, but we expect to continue doing these type of bolt-on acquisitions on a regular basis.

A few comments on our internal investments. Our acquisitions compliment significant internal investments we make to better serve our customers and position the company for long-term growth. Just let me mention a few. One is employee development, which is a very important component of the merger integration, particularly, driven to cultural integration.

We’ve spent a lot of time training our employees to help them add depth to our company-wide processes. And this ranges all the way from high level leadership training for managers to training in our PPI productivity program for all employees. And I am extremely pleased with how well this has gone, and of course, it's an ongoing process.

Then technology development, our R&D track record continues to distinguish us in the industry. And we are getting better and better at targeting our research dollars to the most promising application.

Our product vitality for the Analytical Technology segment is 23% year-to-date. This is the percentage of revenues we generated in that segment from products introduced in the past two years. Recent new products, such as the three mass spec systems we launched at ASMS and the new RNAi platform we announced this week, will contribute to that metric going forward.

In other area where we are investing heavily internally is in sales and marketing. We’re placing a great deal of attention to initiatives that strengthen our commercial presence and help us drive revenue synergies across the company. Examples of that include new tools for training our sales people, key account management and leveraging our customer channels and global presence, and then last capacity expansion.

We’re investing in new facilities that will allow us to meet customer demand for our products and services. And let me mention two here that we recently announced. One project is in our Biosciences business. We have committed $11 million to build a new BioSensor in Utah for the manufacture of our BioProcess products. We continue to see excellent growth here especially in BioProcessing containers.

There are currently thousands of new biotech drugs in the pipeline, and our single-use containers help our customers eliminate contamination during the processing of drugs under development. Over the next four years, we plan to add 90,000 square feet of capacity at that site in Utah.

The other expansion project that I would like to mention is in India, where we are building a $17 million facility that will support growing demand for our BioPharma services in that country.

As we’ve mentioned before, it’s estimated that nearly 25% of all clinical trial patients will be in India by the year 2010. This 100,000 square foot facility will be used to package and distribute the pharmaceutical supplies that patients need in India and other parts of the world.

So we feel we are in an enviable position with the resources doing best in both external and internal growth drivers. And this gives us a number of options for creating value for all our stakeholders, employees, customers and investors.

So with that I would like to quickly comment on the guidance before I hand over the call to Pete Wilver.

With three quarters behind us, we obviously have better feasibility to our full year results. And based on three quarters this year, three record quarters, we are again raising our adjusted EPS guidance for 2007. We are raising the high end of our adjusted EPS guidance by $0.03 and expect our performance for the year to be in the range of $2.56 to $2.59. And this increase would result in 34% to 36% growth in adjusted EPS over our excellent performance in 2006.

We are also raising our revenue guidance by a $100 million to a range of $9.60 to $9.65 billion. And this would lead to a revenue increase of 8% to 9% over 2006. So with that, I will turn over the call to Pete Wilver for more details on our financials. Pete?

Pete 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 metrics that I’ll discuss with you today will be presented on a pro-forma adjusted basis as if Thermo and Fisher have been combined in all of 2006.

Comparisons on below the line items such as interest, taxes, share count 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 48% to $0.65 compared to $0.44 in Q3 last year. We have increased our full year guidance to reflect our solid Q3 results and increase confidence in meeting our annual earnings goals. I will cover our revised guidance in more detail at the end of my comments.

GAAP earnings per share in Q3 were $0.49, up from $0.30 in the prior year's quarter, primarily as a result of increased earnings from the merger, improved operating performance and a lower tax rate including a one-time favorable adjustment of $0.05 in 2007. These items are partially offset by higher acquisition, intangibles amortization.

Our press release contains a detailed reconciliation between GAAP and adjusted EPS. Revenues in Q3 increased 7% year-over-year to $2.40 billion. Organic revenues in the quarter were up 5%, excluding favorable currency translation of 2%. There was no material impact in the quarter from non-Fisher merger related acquisitions and divestitures. During the quarter, bookings slightly exceeded revenues again, by just under 1%.

In the Analytical Technology segment, revenues rose 12% on a reported basis and almost 7.5% organically. In the quarter, we saw a strong growth across all of our major markets including life sciences, diagnostics 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 4% both on a reported basis and organically. We saw growth across most of our major market segments, with continued strength in BioPharma outsourcing services.

By geography, we saw organic growth across all our major regions. North America grew organically at slightly above the company average, and Asia Pacific grew at more than double the company average. Europe and the rest of the world grew in the low single-digits against particularly strong growth in the year ago quarter.

In terms of operating income, Q3 adjusted operating income increased 17% year-over-year to $405 million. Adjusted operating margin was 16.9%, up 150 basis points from 15.4% in the year-ago quarter on a pro forma basis.

Stock compensation expense was $13 million in Q3, as compared to $19 million in the prior year on a pro-forma basis, which contributed 30 basis points to the year-over-year margin expansion in the quarter. The balance of the margin expansion came from pull through on our incremental organic revenues and the impact of our integration, sourcing and productivity initiatives.

Analytical technologies Q3 adjusted operating income increased by 26% year-over-year, and adjusted operating margin was 19.4%, up 210 basis points versus 17.3% last year.

Laboratory product and services Q3 adjusted operating income, increased by 10%, and adjusted operating margin increased by 70 basis points to 14%, as compared to 13.3% in the prior year.

Adjusted gross margin was 40.8% in Q3, up 100 basis points from 39.8% in the year-ago quarter. Primarily as a result of price increases net of inflation, volume leverage, and the impact of outsourcing and productivity initiatives.

Adjusted SG&A was 21.5% of revenue in Q3, down 40 basis points from 21.9% in the year-ago quarter, primarily as a result of volume leverage, integration synergies, and lower stock compensation expense.

R&D expense was 2.4% of revenue in Q3, flat with the year-ago quarter. Analytical Technologies R&D expense was 4.9% of revenue, also flat with the prior year. As I’ve mentioned previously, analytical technologies represents about 80% of our R&D spend for the company.

In terms of below the line items, adjusted net interest expense was 19 million in Q3 up $12 million from the prior year as reported, primarily as a result of the merger. Other income of $1 million was flat with the prior year.

Our adjusted tax rate was 24.6% in Q3, consistent with our Q2 rate, and down significantly from 30.6% last year for Thermo standalone. It’s important to note that the one-time tax benefit of $0.5 this quarter that was mentioned in our press release and earlier in my comments, did not affect our adjusted tax rate. It’s only reflected in our GAAP tax rate.

Average diluted shares for the quarter were 447 million, essentially flat with the prior quarter and up significantly from the prior year as result of the merger. During the quarter, we used approximately $540 million of our $1 billion share buyback authorization to repurchase 10.1 million shares. We continue to expect full year average diluted shares to be in a range of 440 million to 445 million for the full year of 2007.

In terms of balance sheet performance, we ended the quarter with $846 million in cash and in investment, down $128 million from Q2, primarily as a result of share repurchases and acquisitions partially offset by our strong operating free cash flow and option proceeds.

Our debt was essentially flat with the prior quarter at $2.2 billion. Receivable DSO was 55 days, up one day from the prior year on a pro-forma basis, and inventory days of supply was 76 days, also up one day from the prior year on a pro forma basis, if you exclude the four day increase that resulted from the purchase accounting inventory step up.

Q3 year-to-date cash flow from continuing operations, as I mentioned, was very strong at $950 million. After deducting net capital expenditures of $103 million Q3, year-to-date free cash flow from continuing operations was $847 million. As a result of our strong cash flow performance year-to-date, we now expect 2003 cash flow from continuing operations to be in the range of $1.1 billion net of merger-related cash flows.

So, let me just review the guidance with you that we have on our press release. We're increasing our adjusted EPS to a range of $2.56 to $2.59, as compared to our previous guidance of $2.50 to $2.56, primarily as a result of our strong Q3 operating results and better visibility on our expected Q4 results. This range represents 34% to 36% growth over our 2006 adjusted EPS of a $1.91.

We're also increasing our full year revenue guidance by a $100 million to a range of $9.60 to $9.65 billion, as compared to our previous guidance of $9.50 to $9.55 billion, as a result of acquisitions and more favorable foreign currency translations. This range represents an 8% to 9% increase over our pro-forma 2006 revenues of $8.87 billion.

Finally, our integration projects continue to progress well, and a good number of them have already been completed. So we remain confident that we will achieve at least $75 million of adjusted operating income synergies in 2007.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Paul Knight of Thomas Weisel Partners. Your line is open.

Paul Knight - Thomas Weisel Partners

Hi, Marijn.

Marijn Dekkers

Good morning Paul.

Paul Knight - Thomas Weisel Partners

Can you talk about the dynamics going on right now at Fisher specifically the slowest business has been the laboratory furniture area. When should we expect to see maybe some synergies between this year and the prior Thermal Electron I guess is the summary?

Marijn Dekkers

Yeah, this question goes back to Fisher Hamilton, which was put in discontinued operations by Fisher prior to the merger and when we did the merger a year ago we took it out of discontinued operation. We have seen some very good collaboration between that business and our Basic Laboratory Equipment and Consumables business. Lot of passing on of leads and because as you know the Laboratory Furniture Business is basically the first contact that we have with a customer that is going to build a new laboratory. Having that contact and with the lead passed on to Laboratory Equipment leads to sort of a running start talking to that customer about equipping the lab not just now building the lab and putting furniture in. So, we expect overtime from these leads to get revenue synergy.

Paul Knight - Thomas Weisel Partners

And then, last, Marijn, the guidance implies maybe a little more organic growth in the fourth quarter, what's going on to do that?

Marijn Dekkers

Well, the guidance doesn’t really imply more organic growth in the quarter. The increased guidance on EPS is really the result of the earnings momentum that we have had so far in the year. We had another very, very strong margin expansion quarter in Q3. And we think that will continue in Q4. So it’s more a comment on the overall earnings capability of the company.

Paul Knight - Thomas Weisel Partners

Okay. Thanks.

Marijn Dekkers

Thank you.

Operator

Our next question comes from Ross Muken of Deutsche Bank. Sorry, if I mispronounced your last name.

Ross Muken - Deutsche Bank

Thank you. Congratulations, guys on a very strong quarter.

Marijn Dekkers

Thank you, Ross.

Ross Muken - Deutsche Bank

As we look, more to your comments at the beginning of the call. You noted that Pharma was stable and that Biotech continues to be strong. We’ve had a fair amount of management change in the last year and a half in both those industries there has been a major restructuring effort. Are we starting to see any sort of change in strategy relative to purchasing or their approach to how they will go about the procurement process or are we still sort of, in a stage where they are still trying to figure out things internally and really have it necessarily bought into the one-stop shop type of view?

Marijn Dekkers

Well, it’s very dependent on which pharma company you are talking about there is a whole difference in focus on these type of opportunities. We have some companies who embrace us and the approach that we are bringing in helping them do more consolidated purchasing, and then we also have some pharma companies who basically just haven’t made something like this a priority.

So it’s a very broad range of responses. I would say typically that the companies, who aren’t going through some other major type of turmoil, are the ones that have most capacity to focus on what we can bring them. So the ones who basically are doing the best are having the time to also focus on this it seems, and others who are really struggling find it harder to make the time to change the way they are purchasing.

Ross Muken - Deutsche Bank

And relative to your comment on the commodity market, as we look at the emerging markets in general. Have we continued to see a broadening out of demand across customer segments, not just only related to some of the commodity or industrial related groups within some of theses fast growing countries and have we seen any impact from some of the scares in China relative to food quality or safety quality of consumer goods?

Marijn Dekkers

Yeah. Absolutely, China initially was very much of a growth pattern that supports their infrastructure build-outs of cement and steel and mining and refineries and things like that, that really help them build-out their infrastructure. But we are seeing much more demand now in Life Sciences, in hospitals or academic labs that are being built. Food safety is becoming clearly more of an issue. And that will take off over the next few years, not necessarily in Q3.

In Q3 we saw more demand on customers of those Chinese companies in Western countries who are trying to put a sort of a quick analysis in place to find out, did they buy something that was heavily contaminated. But, at the source, where the stuff is really being made in China, we expect to see significant investments over the next few years.

And then India, really the demand there is heavily on the Life Sciences side, more so then on the infrastructure build-out side. As I mentioned we are doing an expansion there to support clinical trials, lot of CRO type of laboratories, contract laboratories being built there to support these clinical trials. So that helps the demand over there.

Plus the generic pharma companies in India who decided a few years ago, not just to meet to generic drugs but to start trying to get the [dose] in drug development. They are also building drug development laboratories, so Life Sciences demand in India is really very significant from a growth point of view.

Ross Muken - Deutsche Bank

And just one quick housekeeping question. You mentioned product discontinuations on the call, was there any impact in the quarter, and how should we think about modeling that going forward?

Marijn Dekkers - President & CEO

Well as we try to talk about the modeling going forward, but I will give you an example of actually Paul Knight asked about laboratory workstations. Now laboratory workstations was a business that wasn't doing all that well, and basically was a breakeven business. We have looked at this, we have made it the pride of the company, but we also said they have been doing some business that we really shouldn't be involved in it. We don't make any money on it; it’s not good business, let’s rationalize certain product lines.

As a result of that, you, of course, got headwind from an organic growth point of view, quite significant in laboratory workstations case because it’s a $200 million business, but we have now gotten them into a profitability profile in the mid-teens on operating margin rather than breakeven so they are contributing beautifully now to EPS. So, that creates some headwinds from an organic revenue point of view, and we are doing that in a select number of businesses where we have an underwhelming product lines, and it’s not a huge number, but if you want to quantify it maybe 0.5% or so of revenue growth that's holding us back.

Ross Muken - Deutsche Bank

Great. Thank you, guys.

Marijn Dekkers

Thank you.

Operator

Our next question comes from Derik De Bruin of UBS. Your line is open.

Derik De Bruin - UBS

Hi, good morning.

Marijn Dekkers

Good morning.

Derik De Bruin - UBS

Given the huge growth in outsourcing, both the broad and domestically, I mean, would Thermo consider moving more aggressively into the sera space?

Marijn Dekkers

Well, it’s a very big industry with a few different aspects, Derik. We really like to part that we are in because of it’s really in line with our strength, which is the packaging, the distribution and logistics of samples that are being used, which is high precision work, and it helps us leverage the legacy Fisher capability of getting the right stuff to the right people at the right time, so to speak.

So that’s part of it. We have a very strong position and we are building out organically like the India investment is in line with that and the priority solutions acquisition, but to go beyond that and become a more of a CRO is not really a high priority for us.

Derik De Bruin - UBS

Okay and just a follow-up on Ross’s question. So, if I heard you correctly, you said you had about a 0.5% headwind from discontinued products sort of plough in this quarter?

Marijn Dekkers

Well, I don’t want to give you sort of an exact number, but what Ross asked, what is the impact roughly of that, now and going forward for the next quarters, and I would say, yeah, that’s about the number.

Derik De Bruin - UBS

Okay. But I guess you are still confident on your numbers for looking into 2008 and even from your analysis view in the 6% to 7% range?

Marijn Dekkers

Yeah. I mean that’s certainly what we are targeting.

Derik De Bruin - UBS

Okay. And likewise for the 6% range for 2007 as well?

Marijn Dekkers

Well, again, it’s certainly what we are targeting. We did in Q1 and Q2, 6% organic growth, in Q3 5%. So yeah, it’s going to come out somewhere between 5% and 6% for the year. But, again, I would emphasize that these fluctuations quarter to quarter from an organic growth point of view are going to happen. It’s not an exact science here of us being able to mail a certain number consistently every single quarter, so there are going to be fluctuations quarter-to-quarter in organic growth.

Derik De Bruin - UBS

Okay. Thank you.

Marijn Dekkers

Okay. Thank you, Derik.

Operator

Our next question comes from Quintin Lai of Robert W. Baird. Your line is open.

Quintin Lai - Robert W. Baird

Hi, good morning. Congratulations on the quarter and congratulations on the approaching anniversary of the merger.

Marijn Dekkers

Thank you, Quintin.

Quintin Lai - Robert W. Baird

Now that you've delivered so well on the 2007 metrics, could you kind of give us a glimpse a little bit about the 2008 synergies that you talked about when you did the deal last year, and in that light some of divestitures that you’re doing now. Is that just kind of being proactive towards those 2008 goals?

Marijn Dekkers

Yeah. We’re not really doing divestitures. To make sure we have been doing these bolt-on acquisitions we’re not really doing divestitures, that the product rationalization that I was referring to is more of an internal discontinuation of certain product lines, but we don’t divest those businesses.

Quintin Lai - Robert W. Baird

Understand.

Marijn Dekkers

So 2008, and the synergies it's going to be a little bit different. On the cost side, obviously the easy stock has been done through peaking in the first year. If I can say it that way, and now we are more driving synergies within certain businesses that had significant overlap, particularly in the Clinical Diagnostics and in the Laboratory Equipment businesses where we had clearly overlap with some of the Fisher businesses. And we have cost synergies that we can drive and that's more of the 2008 cost synergies piece.

On the revenue synergies, we’ve had little revenue synergies in 2007, again as planned but we expect to get revenue synergies in a number of areas and one is going back to Ross’s question on the large accounts. We expect overtime to gain share at the larger accounts with our consolidated approach. So that’s a revenue synergy.

We also expect overtime to be able to sell more of our self manufactured products through the Fisher catalogue. That is a revenue synergy that helps the earnings but not the revenue growth, because it is very often a substitution of the sale that we were going to make anyway. It will just be a sale at higher margin, because it’s a self manufactured product. So you don’t see that really in the revenue line, but you do see it in the earnings line.

And then a third part of what we will see in 2008, is a leverage of the legacy Thermo capability particularly in China and to drive more of legacy Fisher revenue in China. And along those lines we are coming out with a Chinese research market catalogue Fisher catalogue in Chinese very soon that we expect will help drive growth there.

So cost synergy is more on the operating side rather than the corporate side and these revenue synergies that I was talking about those three areas should start to kick in the course of 2008.

Quintin Lai - Robert W. Baird

Thank you for that and just a follow-up. Strong cash flow generation, I know that you have got some bolt-on acquisitions and more targets to come. What other areas, do you think about pouring cash either on the debt or the equity buyback side?

Pete Wilver

Right now, we have $1 billion share buyback authorization in place. We used about half of that, so we'll continue use that in the future. In terms of the debt, we are basically down to our long-term debt we have no short-term debt on the balance sheet right now. So, I wouldn't expect us to be doing anything, in terms of buying back debt unless something significantly changes in the economics of doing that type of activity. And then, obviously we continue to want to do the bolt-on type acquisitions that Marijn mentioned as our primarily use of the cash.

Quintin Lai - Robert W. Baird

Thanks Pete.

Pete Wilver

Okay.

Marijn Dekkers

Thanks, Quintin.

Operator

Thank you. Our next question comes from Tony Butler's line of Lehman Brothers

Tony Butler - Lehman Brothers

Yes, good morning and thank you. Two questions Marijn. One is allude to synergies that relate to price and productivity. I am curious if you maybe able to quantify the price impact that you are seeing or at least provide some qualitative comments around it? And then second one, Europe may have been slow because of the prior year-over-year compare. Can you actually comment why and I apologize for not remembering, given at least, my impression Europe tends to be weaker in the third quarter. I am curious what really changed from last year to this year and what is just the timing of some orders that came through under legacy Thermo. There really was the change from last year to this year. Thanks very much.

Pete Wilver

Hi, Tony, this is Pete. I’ll answer the Europe question first, I guess. Last year we had and it’s not a number that was ever reported because, it’s a combined number for the two companies put together. But Europe growth was almost 10% last year for the combined company.

Tony Butler - Lehman Brothers

Okay.

Pete Wilver

So obviously, that was a significant growth quarter last year and just created really tough comparison for us. And with the breadth of the company it’s a lot of little things that happened last year. Not just one big item that I could point to you and say, “Hey, we had this huge order that drove significant growth.” It was just a lot of businesses, some of the more lumpy businesses that had significant revenue growth last year. Obviously we still grew off of that number, we just didn’t grow as fast as the rest of the company.

Tony Butler - Lehman Brothers

Thanks, Pete.

Pete Wilver

Thank you.

Marijn Dekkers

Yeah. I will comment on the price. And in our projections for synergies for the Thermo Fisher combination, we did not talk about price upside at all. And quite honestly, we don’t feel that there is an opportunity for that. And what we have done though is we have had a lot of disciplined focus and analysis on pricing in general.

Thermo used to do that on its own, Fisher used to do that on its own and we have started sharing best practices in this regard between the different businesses. Just to make sure that we have a very good understanding of price points in our industry and appropriately price our products. And with a broad range of products that we have going through different channels it obviously is very important to do good analytics on your pricing strategy, and I think combining the two companies, we’ve gotten even better at that than the individual companies were before.

Tony Butler - Lehman Brothers

Thanks, Mar.

Marijn Dekkers

Thank you, Tony.

Operator

Our next question comes from Tycho Peterson of JP Morgan. Your line is open.

Tycho Peterson - JP Morgan

Good morning. Thanks for taking the call.

Marijn Dekkers

Hi, Tycho.

Tycho Peterson - JP Morgan

Hi, following up on some of the comments you made earlier about terming the product portfolio selectively. Has there been any change to the underlying R&D thought process, and how you are prioritizing R&D dollars? And if you could just comment generally on where the R&D initiatives are, that would be helpful.

Marijn Dekkers

Yeah. Not really, I mean maybe to a little extent. The R&D dollars, as Pete said, are for 80% spent in analytical technology segment. So, that’s really where we interact very closely with the scientists in really trying to bring them new technology that helps them do their research or analysis better.

In laboratory products and services, we are more of a sort of routine products provider and there it isn’t so much the hard edge on the technology as it is trying to provide choice and convenience and service to the customer, okay?

So on the analytical technology side, we now have an incredible portfolio, I mean we are over a $4 billion of annual sales there and really truly a very, very strong player with capability on the hardware side with instruments in automations, capability on the software side with our laboratory information management systems, and then, as a result of the combination with Fisher a lot of capability on the consumables and the reagent side. So this puts us in a very good position to drive what we have though a lot about more integrated work flow solutions.

And we are doing that particularly as very new and demanding life sciences applications. So RNAi technology or stem cell research or protein biomarkers where people today don’t have a laboratory infrastructure setup yet, it’s anew application, it’s very demanding, a lot of people want to get into doing that type of work. And we can go in and really help them to put their laboratories together from an integrated workflow point of view swift enough.

And then a lot of our scientist customers respond to that very positively because it really eliminates a big headache for them. So our research hence tends to be focused on, yes we want to be best-in-class in each of these technologies, and we’re not going to give up being best-in-class in Mass Spectrometry, of course. But at the same time, say somebody who buys a Mass Spectrometer, what else are they using before and after that Mass Spectrometer Analysis and how can we help them put that workflow to get it better.

Tycho Peterson - JP Morgan

And then I guess just along those lines, what are your latest thoughts on the diagnostics opportunity something you’d highlighted I think last December at the analyst meeting, and it seems like with some of the recent tuck-ins here, you know, a little bit better positioning in terms of the portfolio, what are your thoughts on that market and where you stand today?

Marijn Dekkers

Well, it's a very exciting market quite honestly diagnostics, particularly, what’s been called molecular diagnostics. I thought all diagnostics were molecular, other than for momentarily build pressure, but it’s called molecular diagnostics, and but basically it’s new diagnostic test have a lot to do with early biomarker indication for certain diseases. And we see conversions between what's currently happening in R&D labs to R&D tools that we are selling our R&D customers. And what's going to happen in diagnostics laboratory, 5 to 10 years down the road, because those new biomarkers that now are being invented by scientists using our technologies are going to be in a clinical lab at some point in the future. And there is a conversions happening, that we believe, we are particularly well positioned for to support our customers in that conversions of getting something that starts today in a research lab into a clinical lab. So, I am excited about it; we are making investments mostly organically at this point to position us to do that better.

Tycho Peterson - JP Morgan

Okay. And then finally, just on some of the productivity initiatives, you’ve talked in the past about sourcing and then particularly within China, and I think you’ve set a $100 million for the year was the goal, is that still the target and how do we think about maybe the opportunity for next year?

Marijn Dekkers

In terms of China sourcing?

Tycho Peterson - JP Morgan

Yeah, and then, into exactly in terms of lower outsourcing?

Marijn Dekkers

Yeah, this about, our spend in China, that’s not the savings, but as you know, transitioning spending from western countries into China sourced mostly component supplies. And we see continued growth of that. We now have four factories in China. We have one in Malaysia. We have a number of factories in low-cost countries in Asia, and we are not at full capacity there, so we are still putting more products in there.

And at the same time, we are expanding our sourcing organization, not just to source for those factories, but also to source components for western factories. And when we are able to do that we typically on say, a part, that’s 30% or 40% savings converting it from a western supplier to a Chinese supplier. So, this is quite significant.

Tycho Peterson - JP Morgan

Okay. Terrific. Thank you.

Marijn Dekkers

Thank you.

Operator

Our next question comes from Jon Groberg of Merrill Lynch. Your line is open.

Jon Groberg - Merrill Lynch

Thanks. Good morning. Congratulations on another solid quarter.

Marijn Dekkers

Thank you, Jon.

Jon Groberg - Merrill Lynch

Just wanted one clarification and then I might add two questions there. Excuse me. On the -- for the lab products and services, kind of, your model that you presented in May was, I think, organic revenue growth of 5% to 6% for kind of ’07 to ’09 period. In the last couple of quarters you have been about 4%. So, just curious some of that are discontinuations, you didn’t talk about in lab workstation, but what do you need to do to get to the more of the high-end of that range in your view?

Marijn Dekkers

Well, I think that. Yeah, some of these product rationalizations are mostly happening in that area, that’s one. Secondly, this is, I believe, where we, we’ll have over time the revenue synergy of an ability to use the channels more to drive self-manufactured product.

To what extent that really will show up in organic growth on that I’m not completely sure. Some of it will, some of it won’t, but we’re confident that the combination of making those products and having this incredible channel to a very fragmented market will help us drive growth there.

Then in addition to the BioPharma Services business in spite of that, which we also expect to continue to see very good growth because the big pharma is outsourcing more and more of their clinical trial work.

So overall, I think we’re well positioned for good growth in those segments.

Jon Groberg - Merrill Lynch

Okay. So again for the lab products and services for your’07 to ’09, you’re comfortable with the 5% to 6% organic revenue growth?

Marijn Dekkers

Yeah.

Jon Groberg - Merrill Lynch

Okay.

Marijn Dekkers

That’s certainly our target.

Jon Groberg - Merrill Lynch

So moving to Analytical Technologies a bit, you made this big investment in Utah on the bioprocess container side, can you mention maybe how BioPharma manufacturing did this quarter, and just kind of the outlook near term, we’ve heard a lot from other companies and customers as well as maybe it’s a bit slowing there?

Marijn Dekkers

Yeah. Let me think about, I'll answer that question. There is one very significant transition that’s going on in that marketplace and that is that a lot of customers have the preference for new applications, new drugs go from animal based serum to what you could say artificial media, so not animal base. They are doing that for a number of reasons, quality control, consistency et cetera. That leads to some dislocations, in the sense that a big customer could have been making a certain drug with serum and now decides to change his methodology and make it with artificial media.

Those discontinuations that we also see, and that leads to quite some lumpiness in the demand for those products, because in some cases if you had the serum business, you may not have the media business, or the other way around if you didn’t have the serum business, you can see a nice upside because you now get the media business. So that’s really sort of leading to some lumpiness there.

On the bioprocess container side, which is our increased investments in Utah to expand capacity that is incredibly robust, because if anything, we are on the right side of the equation there, people have steel reactors now and they want to go to plastic reactors, small bags or containers and disposables because that is a lot easier for them to work with. So there was a move from steel to plastic and there is a move from serum to artificial media and that leads to overall lumpiness.

Jon Groberg - Merrill Lynch

Okay. So in this particular quarter on the bioprocess container side you still saw good growth?

Marijn Dekkers

So, we saw very good growth in bioprocess containers, because we are on the good side of going from steel to plastic but our growth in serum and media was not so good because we have some dislocations with some customers who discontinue serum.

Jon Groberg - Merrill Lynch

Okay. And then, on the margin side for Analytical Technologies, as I look at that internally what you were forecasting. Good synergies on the lab product and services, a little bit than Analytical Technologies and I was just curious is that a mix impact. I know you are still comfortable with your longer-term targets where you can do an operating margin there?

Pete Wilver

Yeah, I think you can interpret that just as a mix impact in the quarter and we are confident with what we talked about for the longer-term for analytical technologies as well as this year.

Jon Groberg - Merrill Lynch

Okay, and then last question Marijn. You talked a lot about M&A bolt-on acquisitions, given your size is that enough do you think to make a small acquisitions say $30 million to $70 million, lump them into your global distribution and get the synergies that you are talking about or do you look at larger opportunities as well?

Marijn Dekkers

Jon, it's hard to plan acquisitions. The bolt-ons we don't really plan, but we know there is enough availability of businesses that become available sooner or later that we know will do a few of them. I couldn't tell you exactly which ones, but we know we will do it. For the larger ones it's just very unpredictable. What's going to become available, nobody really knows. Of course, we are looking and seeing what companies would be a good fit with us, but it's impossible to plan around that. I think in terms of our own capability we are integrating quite a big acquisition here with Fisher that has been going very well. We're not done with it, but we are having a solitaire of integration behind us, we believe. And therefore the capacity of our own leadership team here to take on some other acquisitions, certainly is getting better over time.

Jon Groberg - Merrill Lynch

Yeah, great. Thanks, Marijn.

Marijn Dekkers

Thank you, Jon. We have time for one more caller.

Operator

Okay. Our next question comes from Jon Wood of Banc of America. Your line is open.

Jon Wood - Bank of America

Thank you. You mentioned adding the 200 million in acquisition-related revenue since August, can you give us a sense on what you spent on those deals in aggregate?

Marijn Dekkers

Can we -- just a second.

Pete Wilver

Yeah. If we don’t really, it will be….

Marijn Dekkers

We will be doing in some case.

Pete Wilver

Yeah, it will be included in our queue, obviously. I would say you could think of it in terms of the normal multiples that we pay in terms of revenue.

Jon Wood - Bank of America

Okay. And then, one quick one. In the way of working capital improvements, what have you built into the cash flow forecast for working capital improvements, if any? And then, can you give us a sense of what accounts offer the most opportunity for improvement? Thank you.

Pete Wilver

Yeah. In terms of working capital improvement, honestly, the number that I am talking about it represents the usage of cash in working capital primarily because of the growth of the company. It basically assumes that the days are flat year-over-year, and we don’t have any operational improvement. I expect it will do a little better than that, but it’s relatively a conservative view on the numbers. And when you say accounts, you mean, accounts that’s in the balance sheet?

Jon Wood - Bank of America

Yeah. Just payables, receivables,

Pete Wilver

Yeah. I would say definitely in receivables and inventory, we have a pretty good opportunity to improve our days. As we grow obviously, that we’ll use up some working capital but I think we have an ability to reduce the days down to throw off some additional cash, both inventory and receivables.

Jon Wood - Bank of America

And than Pete, are those improvements are they concentrated to any one division. The legacy Fisher distributor business was pretty efficient. Is most of that opportunity in the analytical?

Pete Wilver

Yeah. I would say most of the opportunities, not necessarily just in analytical, but it’s more in the manufacturing businesses and the businesses where we have a commercial structure, where you have sales offices or you have inventory all over the world and you have smaller pockets of collections, resources and things like that.

As you said the legacy Fisher businesses certainly have a lot more infrastructure and are a lot more centralized in terms of how they manage inventory and receivables, so there is probably a less opportunity for improvement there.

Jon Wood - Bank of America

Great, thanks.

Pete Wilver

Yes.

Marijn Dekkers

Okay, so just a few words in closing. Obviously as you can tell from the tone of this call, we’re excited about another quarter of record performance and we also believe that this quarter and then the previous three quarters demonstrate the success of the merger integration between Thermo and Fisher.

We will continue to leverage our broad capabilities and build on the company’s position as the industry leader, and we look forward to reporting our 2007 yearend results, as well as our expectations for 2008 in our February call. So, as always, thank you for your support of Thermo Fisher.

Operator

Thank you, ladies and gentlemen for joining today’s conference call. You may all disconnect and have a wonderful day.

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Source: Thermo Fisher Scientific Q3 2007 Earnings Call Transcript
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