Thermo Fisher Scienti Fic, Inc. Q4 2007 Earnings Call Transcript

Feb. 6.08 | About: Thermo Fisher (TMO)

Thermo Fisher Scientific Inc. (NYSE:TMO)

Q4 FY07 Earnings Call

February 6, 2008, 9:00 AM ET

Executives

Kenneth J. Apicerno - VP, IR and Treasurer

Marijn E. Dekkers - President and CEO

Peter M. Wilver - Sr. VP and CFO

Marc N. Casper - EVP

Analysts

Ross Muken - Deutsche Bank

Quintin Lai - Baird

Peter Lawson - Thomas Weisel Partners

Tony Butler - Lehman Brothers

Jon Wood - Banc of America

Derik De Bruin - UBS

Operator

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

Kenneth J. Apicerno - Vice President, Investor Relations and Treasurer

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 March 7, 2008. To reach the replay of the call on our website, click on Investors, then Webcasts & Presentations. Please also be aware that a copy of the press release setting forth our fourth quarter 2007 earnings and future expectations is available in the Investor Sections of our website under the heading, Quarterly Results.

I would 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 and as a result, important factors, including those discussed in the company's Form 10-Q for the quarter ended September 29, 2007, under the caption Risk Factors which is on file with the Securities and Exchange Commission and available in the Investors section of our website, under 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 and operating results, the new company's plans, objectives, expectations and intentions and other statements 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.

During this call we will 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 in the press release setting forth our fourth quarter 2007 earnings and future expectations and in the tables accompanying such releases, in the Investors section of our website thermofisher.com, under the heading Quarterly Results. Related information is also available on the Investors section of our website, under the heading, Webcasts & Presentations.

So with that, I would now like to turn the call over to Marijn.

Marijn E. Dekkers - President and Chief Executive Officer

Thank you Ken. Good morning everyone. Thanks for joining us today for our review of the fourth quarter of 2007 and the full year. I am sure you have seen our press release. It was another terrific quarter and that led to a very successful year for us, our first full year as Thermo Fisher Scientific.

So let me get right to the financial highlights for both periods. For one last time, I am going to compare our 2007 revenue and operating performance, except EPS, to 2006 pro forma results as if Thermo and Fisher had been combined for all of 2006.

So, for the fourth quarter, revenues grew to 12% to a record $2.62 billion, adjusted EPS was also a record for the quarter, increasing 33% to $0.76. Adjusted operating income for the quarter rose 27% and we also had another excellent quarter of adjusted operating margin expansion, up 200 basis points to 17.2%. And I remember, when we really began to run this company as a unified operating company back in 2001, our operating margins were not even 10%. So I am very pleased with the terrific progress we have been able to make consistently improving our profitability. And we are able to this by fully leveraging our top line growth including driving price, by capturing synergies from the merger with Fisher and we slightly exceeded our synergy targets in 2007.

We are continuously improving our productivity through our company-wide Practical Process Improvement program called PPI, and we are constantly reviewing our product lines to read out those with less potential in favor of strong products that will contribute to growth.

So our strong finish in Q4 led to excellent performance for the full year. Revenues for 2007 grew 10% to a record $9.75 billion. Adjusted EPS rose 39% to a record $2.65 even better than we expected. Adjusted operating income increased 25%. Our adjusted operating margin for the year expanded by 210 basis points to 16.8%, and we also generated $1.3 billion... over $1.3 billion of free cash flow.

So very strong results for 2007, we are firing on all cylinders. I would like to make a quick comment here on our overall strategy for managing the company, so you understand what drives the business decisions we make. Basically, we look at four key financial metrics. We look at top line growth which includes organic growth complemented by strategic acquisitions. We look at operating margins and our overall goal is to expand our margins by an average of a 100 basis points every year. We look at earnings per share and free cash flow. And the point I want to stress is that we are factoring all of these metrics while we work for fully leverage our capabilities. And that really requires a balanced approach to managing the company.

So could we do more in any single one of those four metrics? For instance could we drive top line growth higher or just be focused on margin expansion? Absolutely. But we are not doing that, because we believe that our ability to strike a balance is further leverage the capabilities of this company most optimally, and obviously that balance is focused specifically on creating share holder value.

Now on to the balance sheet. We ended 2007 with a very strong balance sheet and even more important for using our cash wisely. We made a number of accretive acquisitions that also added about $240 million in revenues. These acquisition give us opportunities to create value by providing complementary technologies, or new commercial capabilities or by allowing us to expand globally or really any combination of these three.

We continued to believe that the highly fragmented life and laboratory sciences industry continues to hold opportunities for acquisitions and we will explore those that are complementary to our business. During the year 2007, we also used about $900 million of our cash to repurchase our stock. So if you added all of, it's really been an incredible year. Not only did we have exceptional financial performance but we achieve it while successfully integrating acquisitions with $6 billion in revenues. Let me tell you, it's taken a tremendous amount of effort by all of our employees and we think they should all be proud of our result.

Through the merger Thermo Fisher Scientific is redefining what it means to be an industrial leader. I m confident that we have what it takes to sustain our growth. We have a unique combination of size and breadth, our continued innovation and a relentless commitment to serving our customers. There's is no question that with $9.7 billion of revenue we are big and that alone doesn't define an industry leader. It's how you leverage your size and portfolio breadth that matters. How do you use it to serve your customers better.

Enabling our customers to achieve their goals drives everything we do at Thermo Fisher Scientific, from product development to our global status strategies. In 2007, we laid the groundwork for future growth by making major investments in these areas. For instance, we've spent $240 million in R&D to fuel a continuous stream of new product launches and workflow solutions on the... our Thermo Scientific brand. This broadens applications for our leading technology in mass spectrometry, elemental analysis, spectroscopy, bioreagents, RNAi technologies just to name a few. I have sworn to not give anything away, but I know that we will have a very exciting lineup of new products introductions at PITCOM next month to kick up another strong year of technology innovation.

Our ongoing commitment to technology development complemented by strategic acquisitions will allow us to strengthen our balanced portfolio of hardware, software and consumables. Consumables now make up about half of our product mix, with instrumentation about a third and the rest being software and services. We also continue to leverage the tremendous excess we have through our customer channels. Take our Fisher catalogues for example, we are using the catalogues to give our existing customers more choices when they need to make a purchase and we are introducing new channels targeted to specific growth markets. The great example is our new research catalogue in China, which will be coming out very soon.

So let me make a few comments on the markets. Across the company, we have great momentum going into 2008 and plenty of opportunity to build on the progress we made last year. We are hearing a lot about economic headwinds in the United States, particularly tied to industrial markets. However, we are not seeing any shift at this point that would have a major impact on our businesses, especially for the first half of the year where we have the most visibility. The life sciences markets continue to serve us well, especially biotech tie-ups are very strong and we are also working to leverage our portfolio of product and services to meet the emerging needs of our key Big Pharma customers and the CROs, to whom they are outsourcing more and more of their work.

Environmental markets in the U.S. have remained robust with new regulations coming into play. Now we are starting to see increased attention to the environment in other parts of the world as well, such as China and expect to benefit from that, going forward. In the global industrial markets, we haven't seen any significant decline in demand and some are still quite strong such as minerals and oil and gas.

In summary, we have a balanced portfolio and we serve a range of end markets. We believe this combination will make us less vulnerable to a slowdown in any one industry. So a comment on the guidance before I hand it over to Pete. Looking ahead to 2008, we where expect adjusted EPS to be in the range of $3.5 to $3.15. This would lead to adjusted EPS growth of 15 to 19% over our strong performance in 2007. We expect to achieve 2008 revenues of $10.5 billion to $10.6 billion, resulting in 8% to 9% revenue growth over our 2007 results.

And with that, I will turn the call to our CFO, Pete Wilver for more details on the financials and the assumptions that were factored into our guidance for 2008. Pete?

Peter M. Wilver - Senior Vice President and Chief Financial Officer

Thanks Marijn. Good morning everyone. As we did last quarter and for the last time as Marijn said, to provide better year-over-year comparisons, the 2006 revenue and adjusted operating income numbers, as well as the working the capital metrics that I will discuss with you today, will be presented on a pro forma adjusted basis as if Thermo and Fisher had been combined in all of 2006. Comparisons of below the line items such as interest, taxes, share-count and earnings per share will be discussed on an adjusted basis as reported.

We had another strong quarter with 33% growth in our adjusted earnings per share to $0.76 compared to $0.57 in Q4 last year. Full year adjusted EPS was $2.65 up 39% versus a $1.91 last year and up $0.20 from the high end of the original guidance of $2.35 to $2.45 that we gave at the beginning of the year. GAAP earnings per share in Q4 were $0.54 up from $0.08 in the prior year's quarter, primarily as a result of increased earnings from the merger and lower merger-related charges, improved operating performance and a lower tax rate, partially offset by higher acquisition intangibles and amortization.

Our press release contains a detailed reconciliation between GAAP and adjusted EPS. Revenues in Q4 increased 12% year-over-year to $2.62 billion and we achieved full year revenues of $9.75 billion for 10% growth over our 2006 pro forma revenues of $8.87 billion.

Organic revenue growth in the quarter was 6%, excluding favorable currency translation of 4% and acquisitions net of divestitures of 2% other than the Fisher merger. Organic revenue growth for the full year was also 6%. Bookings in the quarter were equal to revenues and exceeded revenues by slightly more than 1% for the full year.

In the Analytical Technologies segment, revenues rose 14% on a reported basis and 7% organically. In the quarter, we saw strong growth across all our major markets, including life sciences, health care and industrial. In addition to market strength, our new products introductions also continue to be a key growth driver, specifically in a mass spectrometry, elemental analysis and environmental product lines. For the full year, Analytical Technologies grew at 14% on a reported basis and 7.5% organically.

In the Laboratory Products and Services segment, revenues for the quarter increased over 10% on a reported basis and 6% organically. We saw growth across most of our major market segments with continued strength in Biopharma outsourcing services as well as our research and healthcare catalogue businesses. This was partially offset by continued top line weakness in our safety catalogue and laboratory workstation businesses. For the full year, revenues in laboratory product and services grew 7% on a reported basis and 5% organically.

Moving onto by geography, we saw organic growth across all our major regions, except in Europe which was down slightly against particularly strong growth in the year-ago quarter. North America grew at slightly above the company average, while Asia Pacific and the rest of the world grew at more than double the company average. For the full year, growth was slightly more balanced with North America growing at the company average, Europe slightly below the company average and Asia Pacific and the rest of world in the low double digits.

Our Q4 adjusted operating income increased 27% year-over-year to $452 million. Adjusted operating margin was 17.2% up 200 basis points from 15.2% in the year ago quarter on a pro forma basis. Stock compensation expense was $12 million in Q4 as compared to $18 million in the prior year on a pro forma basis which contributed 20 basis points to the year-over-year margin expansion in the quarter. The balance of the margin expansion came from pull through in our incremental organic revenues, including increased prices and the impact of our integration, sourcing and the productivity initiatives.

For the full year, adjusted operating margins expanded by 210 basis points to 16.8% as compared to 14.7% in the prior year on a pro forma basis. Stock compensation expense was $51 million in 2007 as compared to $75 million in the prior year on a pro forma basis, which again contributed 20 basis point to the year-over-year margin expansion for the year.

Analytical Technologies' Q4 adjusted operating income increased by 34% year-over-year, and adjusted operating margin was 21%, up 310 basis point versus 17.9% last year. For the full year, Analytical Technologies' adjusted operating margin expanded 260 basis points to 19.8%.

Laboratory Products and Services Q4 adjusted operating income increased by 19% and adjusted operating margin increased by a 100 basis points to 13.4% as compared to 12.4% in the prior year. For the full year Laboratory Products and Services adjusted operating margin expanded a 140 basis point to 13.6%. Adjusted gross margin was 40.9% in Q4, up 140 basis points from 39.5% in the year ago quarter on pro forma basis, primarily as a result of price increases net of inflation, volume leverage and the impact of our sourcing and productivity initiatives. For the full year, adjusted gross margin was 40.8%, up a 120 basis points from 39.6% in the prior year on a pro forma basis.

Adjusted SG&A was 21.3% of revenue in Q4, down 60 basis points from 21.9% in the year ago quarter on a pro forma basis. Primarily as a result of volume leverage, integration synergies and lower stock compensation expense. For the full year, adjusted SG&A percent of revenue improved 80 basis points to 21.5%. R&D expense was 2.3% of revenue in Q4, down 20 basis points from the year ago quarter on a pro forma basis. For the full year, R&D expense was 2.4% down 10 basis points from the prior year.

Moving on to below the line items, adjusted net interest expense was $23 million in Q4, up $4 million from the prior year as reported, primarily as a result of the merger. Other income of $2 million was up $1 million from the prior year primarily as a result of joint venture income.

Our adjusted tax rate for the full year was 24% down slightly from our 24.6% full year estimate at the end of Q3, which resulted in a comparatively low Q4 adjusted tax rate of 22.5%. The 2007 Q4 rate is down over 4% from the prior year, primarily as result of tax planning structures that we implemented during the year, many of which were facilitated by the merger. The decrease of 0.6% from our previous full year forecast was driven primarily by an increase in our ability to utilize foreign tax credits and a shift in our international income to lower tax rate jurisdiction.

Average diluted shares were $441 million for the quarter, down $6 million from Q3, reflecting the benefit of the share buyback program that we initiated in Q3 and continued into Q4. For the full year, average diluted shares were $444 million. Average diluted shares for both the quarter and the full year were up significantly from the prior year as a result of the merger. During the quarter, we used $358 million to repurchase 6.3 million shares. This brings total buy backs for the year up to $898 million and 16.4 million shares

In terms of balance sheet performance we ended the quarter with $650 million in cash and investments, down a $196 million from Q3, primarily as a result of the share repurchases and acquisitions partially offset by our strong operating free cash flow. Our debt was essentially flat with the prior quarter at $2.2 billion. Accounts receivable day sales outstanding was 50 days, down 4 days from the prior year on a pro forma basis. And the inventory days of supply were 68 days, down 6 days from the prior year on a pro forma basis. But excluding the increase that resulted in both years from the purchase accounting inventory step up, inventory days of supply was down 3 days.

Improvement in our working capital metrics this quarter after several quarters of flat performance was a result of continued focus on cash-cycle process improvements and best practice sharing across the company. Full year cash flow from continuing operations was $1.50 billion. After deducting net capital expenditures of $156 million, full year free cash flow from continuing operations was $134 billion.

In summary, we finished the year on a strong note and delivered solid performance for the full year across all our key metrics with top line growth of 10%, margin expansion of 210 basis points, free cash flow of over $1.3 billion which is 14% more than our adjusted net income, and adjusted earnings per share growth of 39%. So we've really delivered strong but balanced financial performance, quite a feat given the scale and complexity of the merger that we undertook just over a year ago.

So moving on to our future guidance, we expect our strong operational performance to continue in 2008. Specifically, we are initiating a 2007 revenue guidance range of $10.5 billion to $10.6 billion which assumes no additional acquisitions or divestitures in current foreign exchange rates. This range represents an 89% increase over our 2007 revenues of $9.75 billion.

In terms of adjusted earnings per share, we are initiating our 2008 guidance range of $3.05 to $3.15, which represents a 15% to 19% growth over our 2007 adjusted EPS of $2.65. This guidance assumes that we will complete the remaining $100 million of our current share buyback authorization in 2008, and that our tax rate will be in the range of 24%. It does not include any other significant assumptions with regard to future acquisitions, share buybacks or other uses of our capital, with the exception of scheduled debt repayments. We also expect to see an increase in our stock compensation of expense of about $0.03 per share as compared to 2007.

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

Question And Answer

Operator

[Operator Instructions]. Our first question comes from Ross Muken from Deutsche Bank.

Ross Muken - Deutsche Bank

Hopefully, you guys can hear me, okay?

Marijn E. Dekkers - President and Chief Executive Officer

Yes, we hear you.

Ross Muken - Deutsche Bank

In terms of leading into the quarter, investors had a lot of concern around the organic growth rate. There was lot of trepidation about the overall performance of the business. Obviously very strong quarter. Marijn, you commented on some of the other metrics that are key and important. Is there any change from what we saw heading into 07, throughout 07 now under your first pro forma year in the company, and sort of the end market demand in any of the key segments as we head into 08 and then secondarily, now that you had the business for a year as well, how you would characterize the visibility and the capital equipment exposure that you had in the old Thermo business with the new Thermo Fisher Scientific business?

Marijn E. Dekkers - President and Chief Executive Officer

Okay. Yes, good morning Ross. Your first question about when we were here a year ago and we were looking at the markets vis-à-vis how we were looking at the markets right now, I would say as I mentioned in my comments that anything that's life sciences or healthcare related, is really very similar to a year ago. There is really not any significant change. I would say that from an industrial and environmental point of view, there is today more emphasis and more demand in the areas of food quality and microbiology. A lot of stuff happened in 2007 with respect to concerns along the food chain. So I would say that's definitely stronger and then, of course, as I mentioned, maybe the commodity materials will... the market will at some point get weaker, even though we have not seen any signs of that in our demand from those customers at this point. Go ahead.

Ross Muken - Deutsche Bank

And on the visibility side?

Marijn E. Dekkers - President and Chief Executive Officer

Well on the visibility. We are now 50% consumables and as I mentioned, about a third instrumentation hardware and then the rest of it is services and software. And typically, the backlog you have in consumables is shorter than on the instrument side, because it's more of a getting the order and ship it relatively quickly, while instrument businesses tend to carry a little bit longer of a backlog. So, in terms of months of visibility, I would say the overall company has less visibility 3, 4, 5 months on the road than Thermo Electron used to have.

Ross Muken - Deutsche Bank

I asked what to emerging markets there is big sort of fissure out of the coupling of growth in that even if there is a U.S. slow down particularly they won't be effects in China and some of the other markets. I mean have you seen anything that is giving you an indication that the Chinese market is slowing to any degree, changing its growth trajectory? And then on top of that how do you anticipate demand in the different markets as we head into the Olympics, this summer?

Marijn E. Dekkers - President and Chief Executive Officer

Well we have not seen any slowdown in places like China and India. Actually the numbers were terrific in both countries. I believe that there is a little difference. China is more heavily weighted typically towards the infrastructure build up, more of a demand to... for building commodity materials, particularly high end demand, environmental demand is high there, but also more and more academic and life sciences type of demand. India is very life sciences and healthcare focused, a lot of CRO's are building laboratories in India and more and more clinical trials are going to done in India. So, I would say that the China is more infrastructure build up first and then second life sciences, and India is really heavily on life sciences in terms of growth. And I can see that growth very easily continuing because, quite honestly, some of the growth that the China and India are experiencing are this transition growth from the U.S. to those countries. If we don't do a clinical trial here anymore, but do it in India, the clinical trials still gets done. The U.S. may decelerate in growth but India fix it up and there are a lot of examples of that both in pharma companies putting up labs in China or India and also on the industrial side. So it's not necessarily true that decelerated growth in the U.S. will come with decelerated growth in Asia in my opinion.

Operator

Our next question comes from Quintin Lai from Robert Baird.

Quintin Lai - Baird

Hi, good morning. Congratulations on a nice quarter, nice year.

Marijn E. Dekkers - President and Chief Executive Officer

Thank you.

Quintin Lai - Baird

As you commented that you don't see any change in life sciences, could you kind of decouple, your consumables and instrument business because during this earnings season, we've heard some instrument manufacturers talk about some large pharma companies have had some lumpy cycles especially with the year-end spend, kind of, what did you see in Q4 for your business and then what are your expectations in '08?

Marijn E. Dekkers - President and Chief Executive Officer

Well we didn't really see any sort of significant shifts Quintin, and very similar patterns to the third quarter and second quarter and year-over-year on the pharma side. So I cannot really second to comments that perhaps were made by some of our peers.

Quintin Lai - Baird

And in 2008 the trend of pharma taking some things out to CROs how do you see that impacting your business?

Marijn E. Dekkers - President and Chief Executive Officer

Well actually there is positive, because when ever a pharma company decides not to do an experiment in the lab anymore and outsource it to a CRO, the CRO now has to set themselves up to do that experiment and invariably that leads to an accelerated turn over of equipments. It's an accelerated replacement cycle. So I actually think that some of strengths in the life sciences market is the result of this outsourcing of pharma to CROs.

Quintin Lai - Baird

And my second question here, Pete in 2007, could you give us an idea of what the impact of divestitures were on growth and then, in your 2008 expectations, how much is divestitures from 2007 affecting '08? And then also as a follow up to that anything that we need to watch out for Easter falling Q1 for Q1 modeling purposes?

Peter M. Wilver - Senior Vice President and Chief Financial Officer

Okay a lot of question... So 2007 divestures was pretty minimal impact on our top line it was very limited we had a couple of joint ventures that moved out of our fully consolidated reporting and into a joint venture income recording but it was fairly insignificant, I missed the middle question.

Quintin Lai - Baird

Fine. In 2008, any expectations... any divestitures that occurred in '07 that would be impacted in to '08?

Peter M. Wilver - Senior Vice President and Chief Financial Officer

No, again there's very minimal impact. There is... those joint ventures went out at about the middle of the year, but there's less than 1% impact to the year-over-year reported growth. Obviously, we would exclude those from any kind of organic comparison.

Quintin Lai - Baird

And then, with respect to Easter because now... because any difference [ph] in your business is consumables now?

Peter M. Wilver - Senior Vice President and Chief Financial Officer

Yes. Certainly in Q1 this year, the way our calendar works out, Q1 is going to be a little bit lighter on a year-over-year comparison basis because of the way the Easter holiday falls. It won't effect the full year but we will see an impact... negative impact in Q1 and then we will get it back basically in Q4 as the way that the days will fall out. And that is a significant impact compared to kind of the old Thermo where we had the capital and equipment business now as we're in to 50% consumables. That does have an impact on the year-over-year growth.

Quintin Lai - Baird

Thank you.

Peter M. Wilver - Senior Vice President and Chief Financial Officer

Yes.

Operator

Our next question comes from Peter Lawson from Thomas Weisel Partners.

Peter Lawson - Thomas Weisel Partners

Marijn, you talked about the strength in the environmental business. How big is that business for you and how fast its growing and where do you see that growth?

Marijn E. Dekkers - President and Chief Executive Officer

Well, we have sort of two sets of environmental businesses. One that is serving environmental laboratory and so instrumentation and consumables and software that ends up in a laboratory setting with full water quality or other types of environmental studies. And then another part and this is the fastest growing part is the part where we have air quality monitoring in the real world. So instrumentation that is attached to smokestack and is monitoring all of the gases and other stuff that comes out, in particular Mercury that comes out of the smokestack.

And that particular part of environmental instruments is growing extremely fast. I think our overall exposure to environmental is probably 7% to 8% of our revenue, so $700 million to $800 million. But this particular part of environmental monitoring on smokestacks is growing very rapidly, driven by some very good new products that we introduced to address new legislation in the United States, particularly around the monitoring of Mercury emission.

Peter Lawson - Thomas Weisel Partners

And then moving on to the diagnostic business; last quarter you seemed to be very excited about the idea of convergence between the diagnostics and life science industry. How fast is that business growing for you and where will you see any growth?

Marijn E. Dekkers - President and Chief Executive Officer

Well in general, we have a specialty diagnostic capability that is about $1 billion or so in revenue and the growth there is particularly in two areas, I'd say, one of them is in anatomical pathology where we have seen very, very nice organic growth number in 2007. So this is anatomical pathology similar to businesses like Santana [ph] in the same space that is being acquired by Roche. And the other area is microbiology, and microbiology is basically detecting bacterial infections or bacterial contamination, both from a life sciences point of view and from a food chain point of view and needless to say with everything that's going on in terms of bacterial infection and hospital. What's going on the food supply that business has seen very nice growth as well.

Peter Lawson - Thomas Weisel Partners

Thank you and then just finally Peter, could you explain the lower tax rate in the quarter, looks moderately low and looks like there's some seasonal element to that tax rate. Where does that come from and is that expected next year as well?

Peter M. Wilver - Senior Vice President and Chief Financial Officer

No there is no seasonal element to it. Basically at the end of Q3, we had a full year forecast of 24.6%. At the end of the year, we ended at 24%. So that 0.6% has to get adjusted in the current quarter. So it's simply going from a ... reducing our full year estimate by 0.6% and that was driven by additional usage of foreign tax credits as well as a shift in our income to some lower tax jurisdictions in our international businesses.

Peter Lawson - Thomas Weisel Partners

What's the guidance for '08 for tax?

Peter M. Wilver - Senior Vice President and Chief Financial Officer

24%.

Peter Lawson - Thomas Weisel Partners

Okay, thank you so much.

Marijn E. Dekkers - President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Tony Butler from Lehman Brothers.

Tony Butler - Lehman Brothers

Marijn and a couple of questions. Number one is when you think the analytical instrument business, can you perhaps dive a little deeper into the notion of what seems to be selling best now. Is it mass spec, is it areas of equipment and elemental analysis, is it molecular spectroscopy and is there really any shift among the analytical instrument sub-segments that seems to meriting greater demand. And then second question really evolves around your Asia rest of world business. Well assume it's roughly 10% of the total globe, is it growing such that you could see it being 12% or 13% at the end of 08? Is that how one should think about it or is it still relatively smaller in the grand scheme of the total business? Thank you.

Marijn E. Dekkers - President and Chief Executive Officer

Okay. Hi Tony. So on the analytical instruments, what are we seeing? We are participating in a number of areas, of course mass spec is a very big area for us and that is growing gangbusters mass spectrometry is very much driven by the slew of new product technologies that we have been bringing out over the last few years and I would particularly highlight the Orbitrap technologies there.

And then your question about other areas like elemental and molecular spectroscopy. Another very strong area is elemental analysis and that goes really back to an industrial, more industrial customers base and that has a need for quality control with elemental analysis in the lab. And that is a very, very strong area for us right now in 07 and it looks to be, as I mentioned no slowdown at this point for 08. Molecular spectroscopy is a little bit more in the middle, and sort... can go both ways, more life sciences and more sort of an industrial and it is growing less fast than mass spectrometry and elemental at this point. So does that answer your question?

Tony Butler - Lehman Brothers

Yes, it does and it's very helpful. Thank you.

Marijn E. Dekkers - President and Chief Executive Officer

That's okay. And then Asia, yes, we are obviously growing faster in Asia, particularly China and India than the overall average of the company, but you know when you see 12% to 15% on $1 billion then we got to come up with $200 million to $300 million of extra sales over there, in the year and that's sounds a little aggressive. So I do believe, I haven't done the math but we are around 11% now in Asia and that probably increase by 5% or so in 08, just because we up more share there in the faster growing parts of the world. But there would in $100 million extra, so that grow than a 10% vis-à-vis the company and in the mid-single digit. So, I think that that will pick up about you know a percent a year in Asia extra over the next few years. Unless we do acquisitions there of course and then it would be accelerated.

Tony Butler - Lehman Brothers

Very helpful Marijn. Thank you.

Marijn E. Dekkers - President and Chief Executive Officer

Okay. Thank you, Tony.

Operator

Your next question comes from Tycho Peterson from J.P. Morgan.

Unidentified Analyst

Hi this is Sun Gi [ph] in for Tycho Peterson today. Just building on the previous question, question about the mass spec business, some of your competitors have mentioned. I'm seeing increasing competition in the lower end of the market, particularly in terms of increasing price pressure... pricing pressures. Could you comment on kind Thermo's I guess competitive position, I know you are saying that it's going gangbusters where what the target markets are as far as your outlook for 2008 in this space?

Marijn E. Dekkers - President and Chief Executive Officer

Sure. Marc if you want you can.

Marc N. Casper - Executive Vice President

In terms of mass spec, its Marc Casper speaking, we had good success across our range of products. The hydro products, the Orbitrap obviously continues to be very strong. But we've seen a very significant growth in our triple-quad product line as well and that's given us good strength, both at the higher and lower price points. We have also seen, good momentum, geographically North America, Asia and Europe, all having good growth. So while mass spec is certainly a very competitive market, our reputation as the... certainly the technology innovation leader and continuing to bring up solid new products has certainly positioned us very well in the mass spectrometry market.

Unidentified Analyst

Okay. And as per your 2008 revenue guidance, could you comment on kind of your underlying assumptions for the acquisition impact and that acquisition impacting 2007 and as well as what are your current assumptions are for the currency exchange rate?

Peter M. Wilver - Senior Vice President and Chief Financial Officer

Yes the impact of acquisitions is a little bit more than 1% and the foreign exchange impacted about 1.5% at current rates.

Unidentified Analyst

Thank you.

Operator

Our next question comes from Jon Wood from Banc of America Securities.

Jon Wood - Banc of America

Hey, thanks a lot. Did you provide operating cash flow guidance for '08, I might have missed that, I am sorry.

Peter M. Wilver - Senior Vice President and Chief Financial Officer

No, I didn't provide a number of operating cash flow guidance.

Jon Wood - Banc of America

Can you do it?

Peter M. Wilver - Senior Vice President and Chief Financial Officer

Can I, or will I?

Jon Wood - Banc of America

Will you?

Peter M. Wilver - Senior Vice President and Chief Financial Officer

Yes, we had a very strong year in 2007. As I said we generated $1.34 billion of operating cash flow. Honestly, I think in 2008, that will be a tough number to match, so I would say we're probably looking at a number of around $1.2 billion, is what my expectation is that may get better as we go through the year, but that that's where I start at.

Jon Wood - Banc of America

Okay and then CapEx, is it grow any in 2008?

Peter M. Wilver - Senior Vice President and Chief Financial Officer

Yeah CapEx is actually going to go up a little bit in 2008. We had about 100 and little more of a $150 million in 2007. I expect that number to be more like $250 million in 2008.

Jon Wood - Banc of America

Okay. Great thanks. And then can you give us an update into the integration or consolidation opportunities in the Fisher legacy manufacturing businesses, the Apogens, the Pro-Bios. Just wondering, if you have encountered or discovered any more opportunity versus your initial look into those businesses, a year ago or so, Is there a potential for a little bit deeper if I could going forward.

Marijn E. Dekkers - President and Chief Executive Officer

John this Marijn. No there isn't for me. We are on track with the synergies as we mentioned and we really knew the business very well. We've spent the half year between the announcement and the closing back in 2006, very tightly working with the legacy Fisher management, visiting all the sites and doing business reviews so overlaying that with the Thermo capabilities we had a very I think assessment on what the synergies were going to be and where they were going to come from and I would say, were within 95% correct on our assumptions. So, it's a lot of work that happening across the company, rationalizing some of these facilities. 2008 will be a key year of doing that. But I wouldn't say there is upside in that.

Jon Wood - Banc of America

Okay great. One quick one, if I can sneak one in. The Fisher Healthcare is the healthcare part of your business. Any material change in the outlook there for '08? Thanks

Marijn E. Dekkers - President and Chief Executive Officer

No.Do you mean the healthcare catalog or in general the diagnostics area?

Jon Wood - Banc of America

Yes. Just the clinical lab part of the business, both manufacturing and distribution.

Marijn E. Dekkers - President and Chief Executive Officer

Catalog. Yes so no I think that we believe that the demands there will continue to be good. It was good in 2007 and we believe that, that will continue to be quite robust and there is no real indications going into this new year that that things in this market will be significantly different.

Jon Wood - Banc of America

Thank you.

Marijn E. Dekkers - President and Chief Executive Officer

Thank you John.

Operator

Our next question comes from Derik De Bruin from UBS.

Derik De Bruin - UBS

Good morning.

Unidentified Company Representative

Good morning Derik.

Derik De Bruin - UBS

During your Analyst Day last May you had talked about 2009 and operating margin targets somewhere in the 19% to 20% range. Two questions; are you still comfortable with that and I guess can you just give us a color on what the mix is in terms of margin expansion, gross margin expansion and operating costs. I guess just what's going into driving that. I get a lot of these questions from clients, just trying to factor out what's going in?

Marijn E. Dekkers - President and Chief Executive Officer

That's makes it a very good question. So Derik, if you look over 2007, our EBITDA in margin is closed to 70%. So our goal is to expand on our operating margins by 100 basis points a year on average and we believe that we can do that in the next number of years. So that's 19% to 20% that we're talking about for 09, is certainly within reach.

Derik De Bruin - UBS

Okay.

Marijn E. Dekkers - President and Chief Executive Officer

It doesn't help to come off a 200 basis points here obviously in 2007 and I forgot your next the second question.

Derik De Bruin - UBS

Just the contributions for my guess your EBITDA gains, gross margins expansion.

Marijn E. Dekkers - President and Chief Executive Officer

So I think typically we sort of think about top line growth adding about half of our own margin expansion and the other half coming from key productivity activity. That includes PPI sourcing from restructuring. So, it's sort of a 50-50 balance of increased profitability.

Derik De Bruin - UBS

The safety business has been a drag for a while. I guess you know, is it on short list and could you potentially divest it?

Marijn E. Dekkers - President and Chief Executive Officer

We are not going to divest it. There's two phases to the safety business, one is the core business which is actually doing quit well and this is providing safety supplies to laboratories, in particular people work who in laboratories and want to protect themselves. So that's very much in line with our overall research market catalog and completely integrated from a supply chain point of view. So there's no we could divest it. The other piece of it is a piece that is specifically focused on the fire and preparedness market, so this is everything that has do with Homeland Security, first responders equipping themselves with safety devices in case there is a calamity happening. And that is the part that is really rapidly decreasing in size.

Obviously it peaked, few years after 9/11 and then in last few years it has come down significantly and though it's not really that bigger part of that over all business, may be only 25%. The decline there is so significant that it drags down that whole division. But it is a market that we are serving we are serving it with the same capability and infrastructure as we are serving the lab market. So you cannot slice that out and say lets divest it is what it is. It's a very, very up and down business and the demand for that business I hope it doesn't happen but demand for that business could spike again if there would be some type of terrorist event unanticipated in the U.S. So it is what it is we are living through it. I think the year-over- year comparisons are getting easier on it. Of course I said that last year as well and I was wrong last year, but we believe it should to be true this year.

Derik De Bruin - UBS

Okay that's very helpful. I guess with that business if I recall from the... just recall it was that more of the fact that appropriate funds were never spent or just completed less investment in overall preparing to see this.

Marijn E. Dekkers - President and Chief Executive Officer

I think in general there was such a spike in investments, and then when the Iraq war started to cost more and more money I think that was a sought a reduced ability to spend truly on Homeland Security which is really here in the Homeland.

Derik De Bruin - UBS

IGHT

Marijn E. Dekkers - President and Chief Executive Officer

And I saw that the budget proposals, again which has spiked for Homeland Security. So may be there will be a re-equilibration. But who knows what's going to happen with new politics in Washington pretty soon. I am not really, it's an integral parts of the business. It has it's ups and downs, we'll take it the way it comes.

Derik De Bruin - UBS

Great. I'll get back in the queue. Thank you.

Operator

I am showing no further questions at this time.

Marijn E. Dekkers - President and Chief Executive Officer

I just want to say a few things in closing. I think you've heard from our enthusiasm that we are very happy with how 2007 finished up for us. We continue our track record of strong financial performance and we've successfully integrated what was really a major acquisition that we believe is transforming our industry. And we are defining what it means to be a leader in this space. And with our unique position, we think we're able to capitalize on the opportunities that we have, so very focused on creating value for our customers, our shareholders and our employees.

So thank you very much for all of your support of Thermo Fisher and we are looking forward to updating you on the first quarter of '08 in three months. Thank you very much.

Operator

Ladies and gentlemen, this does concludes your program. You may all disconnect. Everyone have a great day.

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