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Thermo Fisher Scientific, Inc. (NYSE:TMO)

Q3 2007 Earnings Call

October 25, 2007 9:00 am ET

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

Operator

Good morning, ladies and gentlemen, and welcome to theThermo Fisher Scientific Third Quarter 2007 Earnings Conference Call. I wouldlike to introduce our moderator for the call, Mr. Kenneth Apicerno, VicePresident, Investor Relations. Mr. Apicerno, you may begin the call.

Kenneth Apicerno

Good morning, and thank you for joining us. On the calltoday, we have Marijn Dekkers, our President and Chief Executive Officer, MarcCasper, Executive Vice President, and Pete Wilver, our Chief Financial Officer.

Please be aware that this call is being webcast live andwill be archived on our website thermofisher.com, until November 23, 2007. Toreach 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 releasesetting forth our third quarter 2007 earnings and future expectations isavailable in the investor section of our website under the heading quarterlyresults.

We’d like to begin the call by reading the Safe Harborstatement. Various remarks that we may make about the company’s futureexpectations, plans, and prospects constitute forward-looking statements forpurposes of the Safe Harbor provisions underthe Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated bythese forward-looking statements, as a result of various important factorsincluding those discussed in the company’s Form 10-Q for the quarter ended June30, 2007, under the caption, risk factors, which is on file with the Securitiesand Exchange Commission and available in the investor section of our website,under the heading "SEC Filings."

We also may make forward-looking statements about thebenefits of the merger of Thermo Electron and Fisher Scientific, includingstatements about future financial impacts on operating results, the new company'splans, objectives, expectations, and intentions and other statement that arenot historical facts.

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

Also during this call, we’ll be referring to certainfinancial measures not prepared in accordance with Generally AcceptedAccounting Principles or GAAP. A reconciliation of the non-GAAP financialmeasures used on this call to the most directly comparable GAAP measures isavailable on the press release setting forth our third quarter 2007 earningsand future expectations and in the tables accompanying such releases in the "investors"section of our website, www.thermofisher.com, under the heading "quarterlyresults."

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. Thanksfor joining us. We have very good news to report to you again this quarter. Asyou can saw in the press release, we had record third quarter financialperformance.

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

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

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

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

With our gross portfolio, there are some unattractiveproduct lines and rationalizing those gives us an opportunity to be morefocused on our strong products. This obviously improves our margins even thoughit 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. Ourgeneral end markets remain healthy, biotech still strong, big pharma is stablewith spending levels similar to what we’ve seen so far this year.

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

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

The life laboratory and health sciences industry remainshighly fragmented, and that gives us opportunities to create value by acquiringbusinesses that offer global expansion, or new commercial capabilities, orcomplementary 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 thelargest laboratory chemical supplier in India formerly owned byGlaxoSmithKline. Qualigens is now part of our customer channel business forresearch markets, and it significantly expands our laboratory, chemicalsofferings and our customer base in a high growth Asian market.

Secondly, in early September, we acquired the instrumentsales business of Davis Inotek. Davisis also being integrated into our customer channels business and broadens ourportfolio with a range of specialty instruments and consumables for researchand industrial process application.

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

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

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

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

We’ve spent a lot of time training our employees to helpthem add depth to our company-wide processes. And this ranges all the way fromhigh level leadership training for managers to training in our PPI productivityprogram for all employees. And I am extremely pleased with how well this hasgone, and of course, it's an ongoing process.

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

Our product vitality for the Analytical Technology segmentis 23% year-to-date. This is the percentage of revenues we generated in thatsegment 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 thatmetric going forward.

In other area where we are investingheavily internally is in sales and marketing. We’re placing a great deal ofattention to initiatives that strengthen our commercial presence and help usdrive revenue synergies across the company. Examples of that include newtools for training our sales people, key account management and leveraging ourcustomer channels and global presence, and then last capacity expansion.

We’re investing in new facilities that will allow us to meetcustomer demand for our products and services. And let me mention two here thatwe recently announced. One project is inour Biosciences business. We have committed $11 million to build a newBioSensor in Utahfor the manufacture of our BioProcess products. We continue to see excellent growth here especially in BioProcessingcontainers.

There are currently thousands of new biotech drugs in thepipeline, and our single-use containers help our customers eliminatecontamination during the processing of drugs under development. Over the nextfour 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 isin India, where we are building a $17 million facility that will supportgrowing demand for our BioPharma services in that country.

As we’ve mentioned before, it’s estimated that nearly 25% ofall clinical trial patients will be in India by the year 2010. This100,000 square foot facility will be used to package and distribute thepharmaceutical supplies that patients need in India and other parts of the world.

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

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

With three quarters behind us, we obviously have betterfeasibility 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 expectour performance for the year to be in the range of $2.56 to $2.59. And thisincrease would result in 34% to 36% growth in adjusted EPS over our excellentperformance in 2006.

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

Pete Wilver

Thanks, Marijn. Good morning, everyone. As we did lastquarter to provide better year-over-year comparisons, the revenue and adjustedoperating income numbers as well as the working capital metrics that I’lldiscuss with you today will be presented on a pro-forma adjusted basis as ifThermo 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 asreported.

As Marijn said, our adjusted earnings per share for thequarter grew 48% to $0.65 compared to $0.44 in Q3 last year. We have increasedour full year guidance to reflect our solid Q3 results and increase confidencein meeting our annual earnings goals. I will cover our revised guidance in moredetail at the end of my comments.

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

Our press release contains a detailed reconciliation betweenGAAP and adjusted EPS. Revenues in Q3 increased 7% year-over-year to $2.40billion. Organic revenues in the quarter were up 5%, excluding favorablecurrency translation of 2%. There was no material impact in the quarter fromnon-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 areported basis and almost 7.5% organically. In the quarter, we saw a stronggrowth across all of our major markets including life sciences, diagnostics andindustrial. In addition to the market strength, our new product introductionsalso 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, revenuesfor the quarter increased 4% both on a reported basis and organically. We sawgrowth across most of our major market segments, with continued strength in BioPharmaoutsourcing services.

By geography, we saw organic growth across all our majorregions. North America grew organically atslightly above the company average, and Asia Pacific grew at more than doublethe company average. Europe and the rest ofthe world grew in the low single-digits against particularly strong growth inthe year ago quarter.

In terms of operating income, Q3 adjusted operating incomeincreased 17% year-over-year to $405 million. Adjusted operating margin was16.9%, up 150 basis points from 15.4% in the year-ago quarter on a pro formabasis.

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

Analytical technologies Q3 adjusted operating incomeincreased by 26% year-over-year, and adjusted operating margin was 19.4%, up210 basis points versus 17.3% last year.

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

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

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

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

In terms of below the line items, adjusted net interestexpense 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 withthe prior year.

Our adjusted tax rate was 24.6% in Q3, consistent with ourQ2 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 thatwas mentioned in our press release and earlier in my comments, did not affectour 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 prioryear as result of the merger. During the quarter, we used approximately $540million of our $1 billion share buyback authorization to repurchase 10.1million shares. We continue to expect full year average diluted shares to be ina range of 440 million to 445 million for the full year of 2007.

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

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

Q3 year-to-date cash flow from continuing operations, as Imentioned, was very strong at $950 million. After deducting net capitalexpenditures of $103 million Q3, year-to-date free cash flow from continuingoperations was $847 million. As a result of our strong cash flow performanceyear-to-date, we now expect 2003 cash flow from continuing operations to be inthe range of $1.1 billion net of merger-related cash flows.

So, let me just review the guidance with you that we have onour 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 aresult of our strong Q3 operating results and better visibility on our expectedQ4 results. This range represents 34% to 36% growth over our 2006 adjusted EPSof 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 previousguidance of $9.50 to $9.55 billion, as a result of acquisitions and morefavorable 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 confidentthat we will achieve at least $75 million of adjusted operating income synergiesin 2007.

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

Question-and-AnswerSession

Operator

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

Paul Knight - ThomasWeisel Partners

Hi, Marijn.

Marijn Dekkers

Good morning Paul.

Paul Knight - ThomasWeisel Partners

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

Marijn Dekkers

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

Paul Knight - ThomasWeisel Partners

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

Marijn Dekkers

Well, the guidance doesn’t really imply more organic growthin the quarter. The increased guidance on EPS is really the result of theearnings 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 inQ4. So it’s more a comment on the overall earnings capability of the company.

Paul Knight - ThomasWeisel 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 - DeutscheBank

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

Marijn Dekkers

Thank you, Ross.

Ross Muken - DeutscheBank

As we look, more to your comments at the beginning of thecall. 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 inboth those industries there has been a major restructuring effort. Are westarting to see any sort of change in strategy relative to purchasing or theirapproach to how they will go about the procurement process or are we still sortof, in a stage where they are still trying to figure out things internally andreally have it necessarily bought into the one-stop shop type of view?

Marijn Dekkers

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

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

Ross Muken - DeutscheBank

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

Marijn Dekkers

Yeah. Absolutely, China initially was very much of agrowth pattern that supports their infrastructure build-outs of cement andsteel and mining and refineries and things like that, that really help thembuild-out their infrastructure. But we are seeing much more demand now in LifeSciences, in hospitals or academic labs that are being built. Food safety isbecoming clearly more of an issue. And that will take off over the next fewyears, not necessarily in Q3.

In Q3 we saw more demand on customers of those Chinesecompanies in Western countries who are trying to put a sort of a quick analysisin 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 significantinvestments over the next few years.

And then India,really the demand there is heavily on the Life Sciences side, more so then onthe infrastructure build-out side. As I mentioned we are doing an expansionthere to support clinical trials, lot of CRO type of laboratories, contractlaboratories being built there to support these clinical trials. So that helpsthe 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 drugdevelopment. They are also building drug development laboratories, so LifeSciences demand in Indiais really very significant from a growth point of view.

Ross Muken - DeutscheBank

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

Marijn Dekkers -President & CEO

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

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

Ross Muken - DeutscheBank

Great. Thank you, guys.

Marijn Dekkers

Thank you.

Operator

Our next question comes from Derik De Bruin of UBS. Yourline 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 anddomestically, I mean, would Thermo consider moving more aggressively into thesera 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 linewith our strength, which is the packaging, the distribution and logistics ofsamples that are being used, which is high precision work, and it helps usleverage the legacy Fisher capability of getting the right stuff to the rightpeople at the right time, so to speak.

So that’s part of it. We have a very strong position and weare building out organically like the India investment is in line with that andthe priority solutions acquisition, but to go beyond that and become a more ofa 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 heardyou correctly, you said you had about a 0.5% headwind from discontinuedproducts sort of plough in this quarter?

Marijn Dekkers

Well, I don’t want to give you sort of an exact number, butwhat Ross asked, what is the impact roughly of that, now and going forward for thenext 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 numbersfor 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 inQ1 and Q2, 6% organic growth, in Q3 5%. So yeah, it’s going to come outsomewhere between 5% and 6% for the year. But, again, I would emphasize thatthese fluctuations quarter to quarter from an organic growth point of view aregoing to happen. It’s not an exact science here of us being able to mail acertain number consistently every single quarter, so there are going to befluctuations 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 - RobertW. Baird

Hi, good morning. Congratulations on the quarter andcongratulations 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, couldyou kind of give us a glimpse a little bit about the 2008 synergies that youtalked about when you did the deal last year, and in that light some ofdivestitures that you’re doing now. Is that just kind of being proactivetowards those 2008 goals?

Marijn Dekkers

Yeah. We’re not really doing divestitures. To make sure wehave 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 internaldiscontinuation of certain product lines, but we don’t divest those businesses.

Quintin Lai - RobertW. Baird

Understand.

Marijn Dekkers

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

On the revenue synergies, we’ve had little revenue synergiesin 2007, again as planned but we expect to get revenue synergies in a number ofareas and one is going back to Ross’s question on the large accounts. We expectovertime 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 selfmanufactured products through the Fisher catalogue. That is a revenue synergythat helps the earnings but not the revenue growth, because it is very often asubstitution of the sale that we were going to make anyway. It will just be asale at higher margin, because it’s a self manufactured product. So you don’tsee 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 aleverage of the legacy Thermo capability particularly in China and to drive more of legacy Fisher revenuein China.And along those lines we are coming out with a Chinese research marketcatalogue Fisher catalogue in Chinese very soon that we expect will help drivegrowth there.

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

Quintin Lai - RobertW. Baird

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

Pete Wilver

Right now, we have $1 billion share buyback authorization inplace. We used about half of that, so we'll continue use that in the future. Interms of the debt, we are basically down to our long-term debt we have noshort-term debt on the balance sheet right now. So, I wouldn't expect us to bedoing anything, in terms of buying back debt unless something significantlychanges in the economics of doing that type of activity. And then, obviously wecontinue to want to do the bolt-on type acquisitions that Marijn mentioned as ourprimarily use of the cash.

Quintin Lai - RobertW. Baird

Thanks Pete.

Pete Wilver

Okay.

Marijn Dekkers

Thanks, Quintin.

Operator

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

Tony Butler - LehmanBrothers

Yes, good morning and thank you. Two questions Marijn. Oneis allude to synergies that relate to price and productivity. I am curious if youmaybe able to quantify the price impact that you are seeing or at least providesome qualitative comments around it? And then second one, Europemay have been slow because of the prior year-over-year compare. Can youactually comment why and I apologize for not remembering, given at least, myimpression Europe tends to be weaker in thethird quarter. I am curious what really changed from last year to this year andwhat 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 Europequestion first, I guess. Last year we had and it’s not a number that was everreported because, it’s a combined number for the two companies put together.But Europe growth was almost 10% last year forthe combined company.

Tony Butler - LehmanBrothers

Okay.

Pete Wilver

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

Tony Butler - LehmanBrothers

Thanks, Pete.

Pete Wilver

Thank you.

Marijn Dekkers

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

Thermo used to do that on its own, Fisher used to do that onits own and we have started sharing best practices in this regard between thedifferent businesses. Just to make sure that we have a very good understandingof price points in our industry and appropriately price our products. And witha broad range of products that we have going through different channels itobviously is very important to do good analytics on your pricing strategy, andI think combining the two companies, we’ve gotten even better at that than theindividual 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. Yourline is open.

Tycho Peterson - JP Morgan

Good morning. Thanks for taking the call.

Marijn Dekkers

Hi, Tycho.

Tycho Peterson - JPMorgan

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

Marijn Dekkers

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

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

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

And we are doing that particularly as very new and demandinglife sciences applications. So RNAi technology or stem cell research or proteinbiomarkers 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 intodoing that type of work. And we can go in and really help them to put theirlaboratories together from an integrated workflow point of view swift enough.

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

Tycho Peterson - JP Morgan

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

Marijn Dekkers

Well, it's a very exciting market quite honestlydiagnostics, particularly, what’s been called molecular diagnostics. I thoughtall diagnostics were molecular, other than for momentarily build pressure, butit’s called molecular diagnostics, and but basically it’s new diagnostic testhave a lot to do with early biomarker indication for certain diseases. And wesee conversions between what's currently happening in R&D labs to R&Dtools that we are selling our R&D customers. And what's going to happen indiagnostics laboratory, 5 to 10 years down the road, because those newbiomarkers that now are being invented by scientists using our technologies aregoing to be in a clinical lab at some point in the future. And there is a conversionshappening, that we believe, we are particularly well positioned for to supportour customers in that conversions of getting something that starts today in aresearch lab into a clinical lab. So, I am excited about it; we are makinginvestments 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 productivityinitiatives, you’ve talked in the past about sourcing and then particularlywithin 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 fornext year?

Marijn Dekkers

In terms of Chinasourcing?

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 westerncountries into Chinasourced mostly component supplies. And we see continued growth of that. We nowhave 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 inthere.

And at the same time, we are expanding our sourcingorganization, not just to source for those factories, but also to sourcecomponents for western factories. And when we are able to do that we typicallyon say, a part, that’s 30% or 40% savings converting it from a western supplierto 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 - MerrillLynch

Thanks. Good morning. Congratulations on another solidquarter.

Marijn Dekkers

Thank you, Jon.

Jon Groberg - MerrillLynch

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

Marijn Dekkers

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

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

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

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

Jon Groberg - Merrill Lynch

Okay. So again for the lab products and services for your’07to ’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 thisbig investment in Utahon the bioprocess container side, can you mention maybe how BioPharmamanufacturing did this quarter, and just kind of the outlook near term, we’veheard a lot from other companies and customers as well as maybe it’s a bitslowing there?

Marijn Dekkers

Yeah. Let me think about, I'll answer that question. Thereis one very significant transition that’s going on in that marketplace and thatis that a lot of customers have the preference for new applications, new drugsgo from animal based serum to what you could say artificial media, so notanimal 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 bigcustomer could have been making a certain drug with serum and now decides tochange his methodology and make it with artificial media.

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

On the bioprocess container side, which is our increasedinvestments in Utah to expand capacity that is incredibly robust, because ifanything, we are on the right side of the equation there, people have steelreactors now and they want to go to plastic reactors, small bags or containersand disposables because that is a lot easier for them to work with. So therewas a move from steel to plastic and there is a move from serum to artificialmedia and that leads to overall lumpiness.

Jon Groberg - Merrill Lynch

Okay. So in this particular quarter on the bioprocesscontainer 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 growthin serum and media was not so good because we have some dislocations with somecustomers who discontinue serum.

Jon Groberg - Merrill Lynch

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

Pete Wilver

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

Jon Groberg - Merrill Lynch

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

Marijn Dekkers

Jon, it's hard to plan acquisitions. The bolt-ons we don'treally plan, but we know there is enough availability of businesses that becomeavailable sooner or later that we know will do a few of them. I couldn't tellyou exactly which ones, but we know we will do it. For the larger ones it'sjust 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 withus, but it's impossible to plan around that. I think in terms of our owncapability we are integrating quite a big acquisition here with Fisher that hasbeen going very well. We're not done with it, but we are having a solitaire ofintegration behind us, we believe. And therefore the capacity of our ownleadership team here to take on some other acquisitions, certainly is gettingbetter 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 ofAmerica. Your line is open.

Jon Wood - Bank of America

Thank you. You mentioned adding the 200 million inacquisition-related revenue since August, can you give us a sense on what youspent 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 wouldsay you could think of it in terms of the normal multiples that we pay in termsof revenue.

Jon Wood - Bank of America

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

Pete Wilver

Yeah. In terms of working capital improvement, honestly, thenumber that I am talking about it represents the usage of cash in workingcapital primarily because of the growth of the company. It basically assumesthat the days are flat year-over-year, and we don’t have any operationalimprovement. I expect it will do a little better than that, but it’s relativelya 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 reducethe days down to throw off some additional cash, both inventory andreceivables.

Jon Wood - Bank of America

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

Pete Wilver

Yeah.I would say most of the opportunities, not necessarily just in analytical, butit’s more in the manufacturing businesses and the businesses where we have acommercial structure, where you have sales offices or you have inventory allover the world and you have smaller pockets of collections, resources andthings like that.

Asyou said the legacy Fisher businesses certainly have a lot more infrastructureand are a lot more centralized in terms of how they manage inventory andreceivables, 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 fewwords in closing. Obviously as you can tell from the tone of this call, we’reexcited about another quarter of record performance and we also believe thatthis quarter and then the previous three quarters demonstrate the success ofthe merger integration between Thermo and Fisher.

We will continue toleverage our broad capabilities and build on the company’s position as theindustry 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, thankyou for your support of Thermo Fisher.

Operator

Thank you, ladies and gentlemen for joining today’sconference 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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