Sigma-Aldrich Corporation, Q2 2008, Earnings Call Transcript

Sigma-Aldrich Corporation (SIAL)

Q2 2008 Earnings Call

July 23, 2008 11:00 am

Executives

Jai P. Nagarkatti – Chief Executive Officer, President

Michael R, Hogan – Chief Administrative Officer and Chief Financial Officer

Kirk Richter – Treasurer and Investor Relations Contact

Analysts

Derik De Bruin – UBS

Quintin Lai – Robert W. Baird & Company, Inc.

Michael Sison – Keybanc Capital Markets/ McDonald Investments, Inc.

Dan Leonard – First Analysis Securities

Dmitry Silversteyn – Longbow Research

Isaac Ro – Leerink, Swann, and Company

Jon Wood – Banc of America

Operator

Good morning, my name is Cody and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2008 results conference call. (Operator Instructions) Thank you. Mr. Richter, treasurer and investor relations contact, you may now begin your conference.

Presentation

Kirk Richter

Thank you and let me say good morning to all of you and welcome you to Sigma Aldrich second quarter earnings conference call. With me today are Jai Nagarkatti , our CEO and President and Mike Hogan, our Chief Administrative and Chief Financial Officer.

Following my introductory comments, Jai will review the highlights of our second quarter performance and full year 2008 expectations, as well as comment on market trends and activities. Following that, I will review our second quarter performance and a few more details. Mike will then wrap up our prepared comments with our sales and EPS guidance and cash flow expectations for 2008. Then we will open up the call for your questions and comments.

Before we begin these reviews, I do need to remind you that today’s comments are going to include forward looking statements about future activities, and our expectations for sales, earnings, and other possible future results.

While we believe these expectations are based on reasonable assumptions, actual results may differ materially, due to any number of factors, including the risk factors listed in our annual report on form10K for the year ended December 31, 2007 and in the cautionary statement in yesterday’s release. We have no plans to update these forward looking statements after this conference.

Also, as the C regulations require us to provide information on any non-gap financial measures covered in today’s conference. That information, which consists of currency and acquisition adjusted sales growth, currency adjusted process improvement savings, and profit and EPS results on both a pro forma and reported basis, is also contained in yesterday’s earnings release, which is posted on our website.

Now, I ask Jai to begin the review, Jai.

Jai P. Nagarkatti

Thank you, Kirk and good morning everyone. The second quarter was certainly filled with lots of activity, both here at Sigma Aldrich and in our broader markets.

What I am sure you are most interested in our reserves and our improved outlook for all of 2008. And a number of you have also been asking about recently announced bills in our market space, and what is going on with customer spending levels and our input costs.

I will cover all of those. But, since our timely interest, and I hope yours as well, is in our second quarter performance and expected future reserves, and the activities that drive those reserves, I will start with the activities that have and are expected to drive our own performance.

Our performance starts with our own strong second quarter reserves that give us added confidence about our ability to achieve our stated long-term goals. This performance, together with a few other items that you will hear more about from Mike, provided the basis for the most recent increase in our earnings per share guidance for 2008.

And I am especially pleased to report that it is our operations that made a significant contribution to our second quarter performance, rather than the currency advantages that drove more of the gains in our reserves in recent quarters.

Our second quarter 2008 sales and value to earnings per share, both hit new quarterly highs, with both growing at double digit rates over last year’s second quarter. Our second quarter sales are over $580 million, exceeded the previous quarterly record, set just one quarter ago. We had the best sales month in our history in June, bumping $200 million for the first time.

And our value to earnings per share increased 16.7%, hitting a new high of $0.70, because strong contributions coming from operations. Said differently, currency adjusted earnings per share grew faster than currency adjusted sales.

The achievements on each of our 5 key initiatives were covered in detail in yesterday’s release. But I will share a few additional highlights about our 2008 reserves and expectations and include my thoughts about general market conditions and any impact they may have on these reserves.

Our three research units, research essentials, research specialties, and research biotech, all had very strong reserves in the second quarter. Sure, the timing of the Easter holiday provided a modest contribution to these reserves, with an estimated contribution to our second quarter growth of about 1%. But, taking that into account and looking at the overall reserves for the first half of the year, each of the research units still exceeded their organic growth targets for 2008. And the quarterly and first half reserves for research biotech were the best we have seen over the past year and a half.

We expect second half performance for each of these research units to be exactly in line with first half reserves. Indicating that we will likely continue to take share in each of these markets over the balance of the year. And we see very little in market conditions on the competitive landscape that should significantly impact these expectations.

Our fine chemicals business, SAFC, is a slightly different story. As we have shared previously, this is our most economically sensitive business. We certainly saw some of that in the second quarter. And have adjusted our expectations for the full year to reflect similar reserves for this business unit.

You may well wonder about this, since we achieved a record sales amount for SAFC in the second quarter. And indicated that booked orders for future delivery at a gain of an all time high at June 30.

While those are both positive indicators, some customers have indicated to us that the business we have had in the past, and previously expected to repeat, may not do so. Only at least we deferred beyond 2008.

That said, we still expect full year organic growth for SAFC to be inline with our first half performance, though admittedly softer than our long term expected organic growth rate of 10%.

Overall, we remain confident about our 2008 stated quote expectations. Our 3 research units that collectively provide about 70% of our annual revenue should continue to exceed expectations and SAFC will again take share in the fine chemical market.

Our second quarter diluted earnings per share, of $0.70, and a related increase in pretax margins, deserted largely to more ongoing process improvement activities, the benefit of lower interest costs, due to reduced rates, and a modest benefit from our supply chain initiative.

Overall, currency rates really did not change much on the end of the first quarter, with the earnings contributions from currency in the second quarter down slightly from what we realized in the first quarter.

And we stepped up our quarterly share repurchase activity to 3 million shares on the earlier 1 million shares per quarter level to take advantage of favorable market conditions. This had little net impact on our earnings per share reserves after taking into account the additional related interest costs from this higher purchase level.

Earning to the impact of cost increases for our raw materials, supplies, and other expenses like freight, utilities and other petroleum related costs, the simple answer to your questions is that we are generally able to pass such cost increases along to the customer. Our annual price increase, which is scheduled for September, will likely be higher this year, than in recent years, specifically, to cover such increases in input costs.

(Inaudible 00:10:35) ongoing process improvement benefits, have, and I would expect it to continue to help offset these higher costs as well. So, we do not expect significant module pressure from raw material and other input costs.

I am confident about the second half of 2008 and our ability to deliver 7% organic sales growth and add another 6% from currency to that, if rates remain at June 30, 2008 levels.

And I am also very comfortable about our ability to deliver increased diluted earnings per share in the range of $2.62 to $2.72, which is an increase of between 12 and 16% for all of 2008.

Going now to the competitive landscape, we have seen a number of trending combinations there. One of them may well result in a new larger player, as measured by revenue size alone in the research market.

Are we concerned? Not overly so. Why? Because we believe we are much broader than anyone supplying consumables in the research tool space. We also have a number of strengths that we believe are difficult for others to match or emulate. Strengths, we believe, are the key to our future success. Strengths that we feel will enable Sigma Aldrich to remain a leader in life science and high technology markets.

These strengths include retaining the number 1 position in what we offer, with the broadest product line in our industry. And we will be diligent about maintaining our leadership in service that has been a hallmark of the company for over 50 years.

We are an established global presence. On top of that, our (inaudible 0:12:36.6) side and catalogs continue to receive the highest rankings from the audience that counts most, our customers, as indicated by Bioinfomatics, and we are not going to be complacent about retaining that recognition.

Another activity that has contributed toward ability to take market shares, is our practice of continually reviewing and adapting our strategy and it’s supporting activities to change with our markets on a three year cycle.

Our current initiatives are expected to carry us to the end of 2008 and provide some growth beyond that. But, we are well on our way to developing a plan for the next 3 years that will begin as we turn the corner into 2009.

We expect to identify new activities to be added over the next 3 years and build on those that are working very well in an effort to maintain at our market growth rates.

As indicated last quarter, we anticipate sharing those planned activities and expected outcomes in the fourth quarter, and as we have done with each previous plan, expecting to hit the ground running on January 1. So, stay tuned for future announcements.

I want to thank you for your ongoing interest in our company. It remains strong. We have the products, the unrefined scientific knowledge, service that is second to none, all (inaudible 00:12:36) by talented and (inaudible 00:12:36) group of coworkers.

Our customers are loyal and our financial position is strong. That is a powerful combination, making us very optimistic about our future. Now, I will ask Kirk to provide more details on our second quarter reserves, Kirk.

Kirk Richter

Thanks, Jai. As we reported in yesterday’s release, second quarter sales increased 14.4% to a new quarterly high of $580.7 million.

All 4 of our business units contributed to this sales growth in Q2 with each of them reporting a double digit percentage increase in sales. For the second successive quarter, currency was a major contributor, providing 7.3 percentage points of the gain. Our organic sales growth was also strong at 7.1% for the quarter.

As we told you last quarter, the holiday timing issue, that reduced otherwise reportable organic sales growth in Q1, was expected to provide an offsetting benefit in Q2. And it did just that.

Our best estimate is that it enhanced reported growth by about 1 percentage point in the second quarter. Our 2 core research businesses, research essentials and research specialties, again performed at better than expected levels, just as they have throughout much of 2007 and during this year’s first quarter.

And research biotech continued the improvement that we have experienced over the preceding 3 quarters, with Q2 organic sales growth of 9.8%.

We have begun to see the impact of the economy on our SAFC business. Our organic sales increased only 4.7%.

Even though we achieved a new quarterly sales high, in excess of $170 million, we have seen some slowing in our pharmaceutical related business.

Details of the Q2 increases for each business unit were included in yesterday’s release. So, I will refer you to that release for the organic currency and acquisition components of growth, and some of the reasons for that growth by unit.

But, I do want to highlight just a few of the more encouraging items that give us optimism about our ability to achieve our full year 2008 sales growth expectations. Sales to academic accounts, in all geographic markets, continued the pattern of increases experienced later in 2007 and in this year’s first quarter.

Even in the US, where government funding is largely consistent with prior year levels, our e-commerce sales increased 21.9% in Q2. US sales improved to 52% of domestic research sales. And internationally, commerce revenues grew by 32% in Q2 reversing the modest decline experienced in Q1.

Moving now to profits, we are obviously very pleased with our 70 cent diluted EPS for Q2, representing an increase of 16.7%. Operating in pretax margins in Q2, 2008 we are 23.1% and 22.6% of sales, respectively. An improvement over levels in last year’s second quarter. The factors contributing to these margins and the second quarter, compared to last year’s second quarter, were mentioned in yesterday’s release. So, I will not repeat them today.

What is important is that results were slightly ahead of expectations, giving us confidence in our ability to achieve continued margin improvement for all of 2008 and the basis for the increase in our EPS guidance that you will hear about from Mike.

The increased Q2 tax rate, compared to last year, relates to a higher net level of international, and state and local taxes, and the absence of the R&B tax credit in the US, consistent with what we saw in Q1 and our expectation for the year.

I will now ask Mike to comment on our 2008 expectations for sales growth, EPS, and cash flow, Mike.

Michael R. Hogan

Thanks, Kirk.

With a 6.7% organic growth rate for the first half of 2008, and with the belief that we will benefit from selling price increases in the second half, to respond to input cost increases, We believe we are firmly on track to achieve our 7% organic sales growth for 2008, just as we stated in yesterday’s release and as Jai has confirmed earlier today.

Our 3 research units are expected to continue to exceed year organic sales growth expectation. And expect 5 to 6 % organic growth in SAFC for the full year, pretty much in line with our first half performance.

So, overall, we are confident about our ability to deliver 7% organic sales growth. That said, while full year results should be 7%, quarterly results over the final 2 quarters of this year are likely to have the same variability that we have seen in each of the last 2 tier.

We do not believe that economic conditions unduly affected our overall Q2 performance. And barring something we have yet to see, they are not expected to have a significant impact on our business for the rest of 2008.

But these conditions do require us to pass along some extra cost increases that we have not had to pass along in recent history. We are certainly not alone here, as others face the same issues. And we are resolute about using whatever price increases may be necessary to enable us to maintain our recently enhanced profit margins and to achieve the margin expansion that we have targeted and have to begun to deliver from our supply chain initiative. These actions, together with the continued implementation of our five strategic initiatives that include some benefits from new sales programs launched late last year and early this year are expected to enable above market growth that continues to take share and delivers our 7% total.

Our sales expectations for each of our business units were included in yesterday’s release so, I will refer you to that release for specifics. And the sales programs supporting those expectations have not changed a whole lot over the last 90 days. For research essentials, we are taking advantage of opportunities in the capital markets by moving our inventories closer to our customers and by bundling products with both research specialties and research biotech to make those products easier to find and to enable customers to improve their work flow.

In research specialties, programs are focused on expanding services that include custom weighing, procurement and compound management. And we have enhanced the visibility of our products by improving the content of our website to make it easier to locate products, including those that are complimentary, enhancing our ability to improve the average size of our customers’ orders.

Research biotech will continue to build on product awareness. We are including more product information in out-going shipments. And we have introduced a number of improved search tools on our website such as Your Favorite Gene that are tied to how scientists rather than the traditional alphabetical or product class listing to facilitate product identification and make it easier for customers to acquire our product.

For SAFC, our booked orders for future delivery at the end of June hit yet another record level and we will continue to leverage our unrivaled scientific knowledge to work on custom solutions and add even more innovative products and services.

The expected currency benefit included in the sales forecast has not changed much from the end of Q1 with a continued expectation of a 6% boost for all of 2008, assuming that FX rates remain at June 30^th level. So all in, our 2008 reported sales could well increase by 13% or so, with additional up-side potential from further efforts to acquire new companies and/or to add new technologies through partnerships, licenses and other collaborative arrangements.

These sales growth expectations and the assumption that currency rates will remain where they were at the end of June, coupled with a modest contribution from the supply chain initiative that we launched in the middle of last year and other margin improvement activities to drive our pre-tax profit gains at a faster pace than sale, should enable us to post an improvement on the 21.5% pre-tax margin that we achieved in 2007.

That is the good news, but offsetting that, our effective tax rate is expected to rise from 2007’s 28.9% to a range of 30 to 32% for 2008, with, as Kirk said, higher international taxes and the absence of the U.S. R and D tax credit in 2008, the primary reasons for this increase in tax rate. There have been several indications that the U.S. government will extend the R and D tax credit for this year, but there is enough uncertainty surrounding the timing of that, that we have not reflected any benefits from this in our earnings guidance at this time.

Finally, we expect a modest contribution to EPS from our recent and on-going share re-purchase activity. When we consider all of these factors, we increased our diluted EPS guidance for 2008 by $0.05 to a new range of $2.62 to $2.72, with this most recent increase due largely to the operating improvements we have made rather than to currency. This results in a diluted EPS gain for 2008 of 12 to 16% over the $2.34 reported for 2007. We are optimistic about our opportunities in 2008. We remain committed to delivering these results.

Cash on hand at June 30^th did not change much from March 31^st, but we did experience some significant changes in the contributing factors. Cash from operations in Q2 was $132 million, about 43 million more in Q2 than in Q1. As our income increased and our receivable days outstanding and inventory months on hand returned to more normal levels. But we used that cash, some incremental debt and some other smaller sources of cash to fund a re-purchase of 3.1 million of shares in Q2 using slightly more than 183 million of cash in all to do so. For the full year, we expect operations to provide 420 to 430 million in cash. We expect to continue buying our shares subject to market conditions and other consideration.

Capital expenditures may increase to about 100 million in 2008, up from 80 million last year as we continue to make larger investments in our fermentation capacity in Israel and in an Asia-Pacific manufacturing hub in China. All of that said, we believe we have sufficient cash and borrowing capacity for both operations and acquisitions for the remainder of 2008. On behalf of Jai, Kirk and all of our colleagues around the world, I want to thank you for joining us. And now, let us open up the call for your comments and your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Mike with KeyBanc .

Michael Sison, KeyBanc Capital Markets/McDonald Investments, Inc.

Hey, guys, nice quarter.

Michael R. Hogan

Thanks, Mike.

Kirk Richter

Thanks, Mike.

Michael Sison, KeyBanc Capital Markets/McDonald Investments, Inc.

I wanted to re-visit a little bit on the comments that you made that — and just make sure I understand the math — your operating income grew 16% in the quarter ’08 versus ’07 and, Jai, you mentioned that your earnings growth grew faster than your organic sales growth. So, if you do the math of the foreign currency, it seems like it might have been a little bit less. Can you help me out with the math there?

Kirk Richter

Sure, I will actually jump in there, Mike. This is Kirk. If you look at the increase in the tax rate —

Michael Sison, KeyBanc Capital Markets/McDonald Investments, Inc.

Right.

Kirk Richter

— offsets it, so we would say that operations were probably up a nickel when you take the $.08 from currency and take off $0.03 from the higher tax rate.

Michael Sison, KeyBanc Capital Markets/McDonald Investments, Inc.

Right, so $1.65, that is still only up 3%.

Kirk Richter

That is over?

Michael Sison, KeyBanc Capital Markets/McDonald Investments, Inc.

$1.60.

Kirk Richter

It is —

Michael R. Hogan

Mike, it is 65 over 60.

Kirk Richter

Sixty.

Michael Sison, KeyBanc Capital Markets/McDonald Investments, Inc.

Oh, I am sorry. Yeah, right 65 over 60.

Michael R. Hogan

It gives you 8% compared to our 7% sales gain.

Michael Sison, KeyBanc Capital Markets/McDonald Investments, Inc.

Oh, that is right. Okay, I understand. Sorry. Then, when you take a look at SAFC, Jai, can you give us a little bit of color in the quarter? You have four different businesses there. SAFC, High Tech, Bio Tech, Pharma and Supply Solutions, which one of those businesses are performing well? I think you sort of noted, but to what degree? Is High Tech and Supply Solutions above 10% and the other two are sort of flat to down?

Jai P. Nagarkatti

Yeah, first of all, I would like for you to keep things in perspective, Mike. That is, a 5 to 6% overall for the year growth in an economically sensitive part of the market is not all bad, first.

Michael Sison, KeyBanc Capital Markets/McDonald Investments, Inc.

Right.

Jai P. Nagarkatti

Second, I think within the four sub-units, within SAFC, we have share with you the Pharma and the Bio Pharma customers, particularly in Europe is where we have started to see some softness. Having said that, Supply Solutions, which is, by far, the most significant component of SAFC is still doing better than what we expected. High Tech is small, so the growth, the double-digit growth rate in High Tech will not really move the needle significantly.

Michael Sison, KeyBanc Capital Markets/McDonald Investments, Inc.

Okay. So, when you think about the 10% goal and I look back at ’06 and ’07, for SAFC, it has been a little bit short of that. Is that still a realistic goal in this environment going forward?

Jai P. Nagarkatti

I think our long-term goal, based on the investments and acquisitions we have made, we still believe that is a realistic goal. Now, in uncertain economic times, we will temper it and give you more — what I call — realistic targets, plan for the worse and expect the best.

Michael Sison, KeyBanc Capital Markets/McDonald Investments, Inc.

Okay and the last question: when you take a look at the increase in pricing that you alluded to, Mike, in November, heading into 2009, that does that lift your 7% organic growth goal a little bit?

Michael R. Hogan

Mike, so just to correct you, it is in September.

Michael Sison, KeyBanc Capital Markets/McDonald Investments, Inc.

Or September, I am sorry.

Michael R. Hogan

So, it will come with, it will help us for four months during the year. It is included in the 7% number and there are some trade-offs there, obviously, volume and price; there are some trade-offs.

Michael Sison, KeyBanc Capital Markets/McDonald Investments, Inc.

So the volume would be a little bit slower, maybe, because of SAFC heading into next year?

Michael R. Hogan

Yeah, and do not forget we do have contracts in place with some of our larger customers that do things that limit the rate of increase in price or delay the timing in which a price increase can come through without having more notice than, say, a month’s time. And so, in terms of 2008, the full benefits of the price increases will not bleed through the income statement, although it will begin to do so in more ’09.

Michael Sison, KeyBanc Capital Markets/McDonald Investments, Inc.

Okay. Okay. Thank you.

Michael R. Hogan

You bet.

Operator

Your next question comes from the line of Dan Leonard with First Analysis.

Dan Leonard, First Analysis Securities

Hi, good morning.

Michael R. Hogan

Morning.

Kirk Richter

Morning.

Jai P. Nagarkatti

Morning.

Dan Leonard, First Analysis Securities

A follow-up, again, on the earnings growth question: so, your math that the $.65 compares to the 60 and, therefore, shows better operational growth versus your sales growth does not seem to incorporate the benefits from the share re-purchase and if you incorporate those, it still looks like margins are compressing a bit year-over-year so, I am wondering if you could walk me through what is behind — at least what I perceive — to be a little bit of a margin compression on you.

Michael R. Hogan

So, Dan so this is Mike. The benefit from share re-purchase left the incremental cost of the debt to make that share re-purchase is well under a penny a share. And so, that is why we did the simple math of, essentially, $.13 up, five from operations, eight from currency, offset by $.03 from an adverse change in taxes.

Dan Leonard, First Analysis Securities

Okay, Mike, remind me what the blended interest rate on your variable debt is.

Michael R. Hogan

It is probably running in the high two’s to low three percent range.

Dan Leonard, First Analysis Securities

Okay and then your comments on the input cost increases, could you remind me what portion of your cogs are raw materials versus freight that you have to pay for and other components that are seeing increases?

Kirk Richter

If we look at that, probably about a third of it is the materials, a third of it is labor and related stuff and a third is all other.

Dan Leonard, First Analysis Securities

Okay.

Michael R. Hogan

Dan, one addition to that comment: the increase in our input cost, in many cases that we have been alluding to, is an indirect increase in oil pressure on prices coming from our vendors. So, their own shipping costs are up markedly and they are passing that along through pricing to us in component materials, just as we will pass it along to our customers.

Dan Leonard, First Analysis Securities

Yeah and then my final question, Mike, you mentioned that you are forecasting about $100 million in cutbacks for 2008. I know previously you were looking for 115 so, why the reduction and where is the projects that are either being pushed off or cancelled?

Michael R. Hogan

It is actually more a cases of how much we can physically get done in a certain period of time. Those of who were listening carefully last year heard us offer numbers like 95 and we ended up at 80. We often have guys attempting to do these projects quickly. We budget for them and, as Jai said, we plan for the worst and expect the best. Well, the same thing happens with capital. We share with you the most aggressive number we are aware of and we often come in spending slightly less than that.

Dan Leonard, First Analysis Securities

Okay, thank you.

Michael R. Hogan

You bet.

Operator

Your next question comes from the line of Quintin Lai with Robert Baird.

Quintin Lai, Robert W. Baird & Company, Inc.

Hey, good morning. Congratulations on a nice quarter.

Michael R. Hogan

Hi, Quintin.

Kirk Richter

Morning, Quintin.

Quintin Lai, Robert W. Baird & Company, Inc.

As we take a look at your Bio Tech business, you are seeing a nice pick up. At the analyst day, you talked about more white coat selling, can you talk about the pick up that you are getting, do you think that it is just market-share gains from the white coat selling or do you think it is just the introduction of new products that are gaining traction?

Jai P. Nagarkatti

Quintin, it is a combination of a number of factors. One of them, obviously, the number of white coat selling, specialists that we have put on the field is having an impact. They are reaching the right customers. We also have added a number of good, new products. We announced the deal with Atlas to enhance our presence in antibody, for example, added 1800 antibodies that were launched. The second phase of another 1800 antibodies will be launched in quarter three. For example, that has been received very well. As you know, these are highly characterized and validated antibodies. Again, making inroads in this type of stuff, again, added TRC2, second phase of the SHRNA with (inaudible 00:35:09). That deal was computed. That significantly almost doubled the SHRNA library and I think it has been received very well.

Quintin Lai, Robert W. Baird & Company, Inc.

And then, kind of as a follow-up to that, we are seeing a lot more deal activity going on. Certainly, interest from big pharma on intervening R and A, are you seeing a pickup in those products, particularly to big pharma? Just a little bit of color on what you think what some of the general trends are.

Jai P. Nagarkatti

Yeah, again, one of the sub-segments of our research Bio Tech unit is the molecular biology and we are seeing very good growth, robust in the molecular biology sub-segment; again, because of and in spite of products, efficiency of white coat selling and both in the pharma and promisingly so in the academic institutions as well. So, it is broad and not particularly limited to one segment of or the other.

Quintin Lai, Robert W. Baird & Company, Inc.

And then, just a follow-up again, on SAFC. You kind of talked about some of the slowdown from some your former customers. Is it just their demand is slowing down so the demand for your product is slowing down or is there a pricing or a switching component to any of what you are seeing?

Jai P. Nagarkatti

Yeah, let me also add here that while we are seeing the booked order back log for future delivery continuing to rise, we are being cautious when we give you these estimates. The pharma projects is where we are noticing customers coming and asking us to either pull back working on the project or push it later. The components like Supply Solutions, where we offer a broad product range for other applications, the demand, the quote request is still at the same rate that we have seen in the first quarter.

I think we are actually — it is not a pricing issue — and it is not a switching issue.

Quintin Lai, Robert W. Baird & Company, Inc.

Thank you. I guess, I am sorry, one last follow-up. You talked in the past about try to do M and A, yourself, acquisition for maybe 3% of overall revenue augmentation, but yet, (inaudible 00:37:47) has been kind of slow. Can you tell us a little bit about what you are seeing in the M and A environment?

Jai P. Nagarkatti

Okay, one of the things that we often share with you guys, for any deal that happens in our space, the phone does ring at Sigma Aldrich. We also shared with you that we have some very specific criteria for acquisition. We obviously looking for unique and different (inaudible 00:38:08) capabilities on things that matter to us and where we are focused. Also, those have to grow profitably and at a much faster pace in our call business and obviously, available at competitive and reasonable pricing. So, we are always looking, at any given time, our business development units within the BU’s have a few things cooking and if there is something we feel that we need to share with you, we will do it. We, however, I tell you, if we do not continue the acquisition, there are other avenues to acquire technology as well and that is in-licensing. And we have done a number of good in-licensing deals as we have released oh, the last three to four months.

Quintin Lai, Robert W. Baird & Company, Inc.

Alright, thank you.

Operator

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

Derik De Bruin, UBS

Hi, good morning.

Kirk Richter

Good morning, Derik.

Derik De Bruin, UBS

So, you have talked about a pickup in some of the academic markets over the last quarters, or just generally an improvement there. Could you just give us a little bit of qualitative feel in terms of what you see in those markets and is what you are seeing really improving spending or is it share — just a little bit qualitative analysis.

Jai P. Nagarkatti

Let me also start off by saying that academic market accounts was up by 30% of our overall sales, first. Second thing is what we are seeing is academic markets, especially in Europe, is stronger than in the U. S. So, that is a very qualitative observation, again, based on the type of products and inquiries that we get; having said that, in the U.S. there are pockets. There are some universities who are spending and getting more grants, disproportionately so than the smaller ones, and having a presence out there with our field sales people, gives us the ability to kind of target those where there is research going on at a faster pace and to capitalize on our presence.

Derik De Bruin, UBS

Okay. Certainly, the SGNA spend was a little bit down this quarter. Is that sustainable assuming that you continue to pull the volumes through?

Kirk Richter

That depends, Derik, on how well we do on sales. I mean, to be very candid, we think that percentage change in SGNA has more to do with the extraordinarily strong sales during the quarter and the relatively fixed nature of a lot of our SGNA costs than it does to any great management skill of controlling costs.

If sales remain at the levels like we have had in recent months, including June, which is the best month we have ever had, you will see SGNA percents stay relatively low.

Derik De Bruin, UBS

Okay, that is helpful. And, I guess finally, there have been a lot of headlines over the last couple of months on the relationship with Sagnamo. Could you just talk about that relationship and the products and how material that is to the bio tech business?

Jai P. Nagarkatti

I think, really again, we continue to be very excited about the technology and Sagnamo is a great company to cooperate and work with. We are developing some tools that we should have ready to ship off the shelf to the university accounts. Having said that, we have a number of good deals that we have announced. The most recent one was with Rosche (ph 00:41:40) and little specialist sales forced going after this and we are very positive. And we will share with you as we unravel more of these deals.

Derik De Bruin, UBS

Thanks.

Operator

Your next question from the line of Dmitry Silversteyn with Longbow Research.

Dmitry Silversteyn, Longbow Research

Good morning, gentlemen, while it is still morning. Congratulations on a very nice quarter.

Kirk Richter

Thanks, Dmitry.

Dmitry Silversteyn, Longbow Research

A lot of my questions have been answered, but I just want to kind of dig back into the slowdown that you are seeing in the pharma and the bio tech industry that you have commented on. Is it specific pockets or regions or are the pharma companies becoming more cautious in anticipation of something? I guess I would just like a little bit better explanation as to what is going on in the pharma market that is affecting your growth rate.

Jai P. Nagarkatti

Dmitry, as I shared earlier, most of the initial softness that we are seeing is in the European pharma companies. I do not want to give you further details because some of these deals with big customers goes up and down. And besides that, in other parts of the world, we are still seeing fairly good demand.

Dmitry Silversteyn, Longbow Research

You also mentioned in your press release and on the prepared remarks that the industrial cell culture business was a little bit down this quarter as well, impacting SAFC sales. Was that also a European phenomena with European bio tech companies slowing down or was that more of a global phenomena?

Jai P. Nagarkatti

I think it is more of the large customer phenomena and having said that, remember in the grand scheme of things, the industrial cell culture part compared to the $2 plus billion of our sales should not have a significant impact.

Dmitry Silversteyn, Longbow Research

Well, okay. Alright, can we talk about what is going on in the Japanese R and G market after being kind of flat on its back for a couple of years, it seemed to have gotten a little bit stronger towards the end of ’07 and the beginning of ’08. Is it continuing to be a source of strength for you or is it kind of reverting back to a flat line position?

Jai P. Nagarkatti

No, I tell you what, the Japanese market we are seeing some life. It is not all dead. This year we are seeing a little bit of growth, which is encouraging and we have obviously taken some different type of steps to approach that market and we feel that is going to continue to get better.

Dmitry Silversteyn, Longbow Research

Okay, so it has more to do with your strategy of not going through distributors and going direct and some of the other things you are doing than the recovery in the overall market.

Jai P. Nagarkatti

That is correct, yes.

Dmitry Silversteyn, Longbow Research

And then a final question just to follow up on the academic market growth that you discussed earlier, I understand about pockets of strength in the U.S. and that European business may be doing a little bit better, but I mean the U.S. has been bad for a long time for you and now it seems to be less of a problem, I think you have spoken more or less positively about this market in the last couple of calls, so has something changed within the market or again, is this your approach to the market that is having more of an impact on your results improving and serving that sector?

Jai P. Nagarkatti

We believe it is a little bit of the latter where we have a more mature sales force who understands the product, have a greater presence and they are going in areas where we see that there are opportunities for us.

Dmitry Silversteyn

Okay. Alright, Jai, thank you.

Operator

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

Isaac Ro, Leerink, Swann, and Company

Hi, guys. Thanks for taking the question. First off, on organic growth, I think in the past you have talked about targeting 7% organic with a sort of 5%, 2% split between volume and pricing. Can you tell us what that split was in the second quarter and then maybe how you expect that to shake out in the back half of this year?

Kirk Richter

Yeah, the pricing did not change much through the second quarter, so still in that 2% range and as we said in our comments, we are looking at what our pricing should be in response to what we are seeing in our input cost and we are in the process of addressing that as we speak. As Mike said, we are standing on saying how much of this can we push through. We obviously get some push back from our customers the same as we give our own vendors, but our goal is to maintain our improved margins to cover our input cost increases and there will be some small trade-off with volume.

Isaac Ro, Leerink, Swann, and Company

Okay and then just secondly, bigger picture as you evaluate your new three-year plan at the end of this year, how would you, looking backwards, kind of characterize your satisfaction with some of the assets you have acquire like R and AI and in areas like that and how does that inform your plans for growth going forward?

Jai P. Nagarkatti

As you recall, I think our pleasant plan, which we are in the third year of, has five initiatives. And we are generally very pleased with the overall progress against each one of those initiatives, whether it be internet superiority, expanding faster growing, or leveraging of process employment and general customer centricity. I think many of these things will form the basis for us to build on in the next three and add a few other initiatives that we have learned talking to customers. Again, stay tuned. We will share a little bit more information as we unravel the plan at the end of the quarter.

Isaac Ro, Leerink, Swann, and Company

Okay and then, just lastly on a couple of housekeeping items, how should we think about the pacing of buyback going forward? I think you said it stepped up to 3 million shares in the quarter. Is that sort of a number you think we should see for the rest of the year? I cannot remember how many are left in the current authorization and then secondly, just tax rate for the second half of the year.

Michael R. Hogan

So, we only have a little over a million shares left in the current authorization and roughly two and of course, that is a board-level issue and we will chat with our board now that we are running out of that to see whether or not they are going to extend that, but I would look at this last quarter as unusual. We had a very weak market. Perceive that. The good news is we have tremendous cash flow and great borrowing capability and we are able to take advantage of things when they happen, but our appetite to date has been kind of a million shares a quarter, which if you recall, essentially covers option exercises and takes about one to 2% of the company off the table each year.

Isaac Ro, Leerink, Swann, and Company

Great and then can you just remind us for tax rate expectations in the back half?

Michael R. Hogan

Sure. In the 30 to 32% range and that assumes that the R and D credit does not pass. If it does pass, it is likely to take us to the lower end of that range.

Isaac Ro, Leerink, Swann and Company

Thanks a bunch.

Operator

(Operator Instructions). Your next question comes from the line of Jon Wood with Banc of America.

Jon Wood, Banc of America

Hey, thanks. Jai, on the research businesses, you have talked extensively about academic, but can you offer some additional commentary on how each of the other two major customer groups did so the pharma account base and the chemical account base. How did those two do relative to your 7% organic growth in the first half?

Jai P. Nagarkatti

Okay, obviously, Jon, if you look at the research business is so broad that we are looking across geographies, across industries and I think most of the questions we are asked about academics — we were trying to answer the academic one. Overall, we are very pleased that we are seeing good growth everywhere, in terms of pharma, bio pharma, the non-pharma sector of the chemical accounts, both here in the U.S. , which is very encouraging and especially in Europe and faster growing capital markets.

Jon Wood – Banc of America

So you do not view the chemical piece of the research or the piece of the research business that goes to chemical companies. You view that as largely insulated from the economic situation.

Michael R. Hogan

So Jon this is Mike. So we often describe our company as a recession resistant but not immune. We are more recession resistant in the research parts of our business where people really do not scale back as much even during tough times. A few of our customers can afford to do so.

I would just have one comment to what Jai made about the academic center. We have spent so much time talking the improvement in academics largely because they had been weak in recent years. Not so much because they are growing at double digits or something now. And so as they rebound to more traditional levels they just give great underlying support to the rest of the business which is growing nicely and add or above expected levels in the research business which is how we could deliver 7% even with SFAC only being in the kind of 4.5 to 5 range.

Jon Wood – Banc of America

Okay. And then back on the M&A pipeline. Jai can you just offer some commentary around the mix of assets you are seeing. I mean are there larger opportunities coming in versus recent history or is the mix still weighted towards the smaller assets.

Jai P. Nagarkatti

I think more weighted towards the smaller assets but I think always there are larger opportunities also coming which we look a lot more carefully.

Jon Wood – Banc of America

Okay. Thank you.

Operator

Your next question is a follow up question from Dmitry Silversteyn with Longbow Research.

Dmitry Silversteyn – Longbow Research

Actually my question has been answered. I have been trying to delete myself from the queue. Thank you.

Operator

Your next question is a follow up question from Mike Sison with Keybanc.

Michael Sison – Keybanc Capital Markets/ McDonald Investments, Inc.

Hey guys. Just curious Jai. When you have tough times from your customers they tend to maybe want to outsource more particularly in fine chemicals. They value equation for outsourcing. Some manufacturing probably increases when they are having difficulty. Are you sensing any of those type of inquiries that is maybe offsetting the fact that it is maybe a little bit slower in total for them?

Jai P. Nagarkatti

We are not particularly seeing that type of opportunities pop up yet Mike. But one of the things we do get an early sign on is, I think, there may be tendencies for pharma companies to start looking back at US and European based resources for outsourcing as opposed to what traditionally they had been looking in the Asia Pacific region. So that is one trend that we are noticing.

Michael Sison – Keybanc Capital Markets/ McDonald Investments, Inc.

Meaning there is – that the outlook for maybe your capital regions could increase.

Jai P. Nagarkatti

Other way around.

Michael Sison – Keybanc Capital Markets/ McDonald Investments, Inc.

Other way around. Oh okay. I see it they are going to bring it more home if you will.

Jai P. Nagarkatti

Correct on larger projects.

Michael Sison – Keybanc Capital Markets/ McDonald Investments, Inc.

On larger projects. Okay. Then Mike could you give us a little bit of help? You sort of commented some the usual, I do not know what the word is, lumpiness in your sales outlook for the second half of the year. You know when I took a look at your third quarter of ’07 it was stronger than your fourth quarter of ’07. So is it just – should we just sort of take a look at that as sort of tougher comps in the third and maybe easier comps in the fourth? Or is there some days (ph 00:53:15) issues that we have to, sort of, be aware of?

Michael R. Hogan

It is not so much days issues. It is that we have a tough third comp and an easier fourth comp. That is part of it. Part of it, Mike, is just as SFAC has grown in important in the company’s overall mix and as biotech has gotten into more kind of significant orders at times like libraries or they have some six figure orders these days. And actually some seven figure orders in a way that the research business which averages $300 or $400 in order do not. We just have orders that move around between quarters in a way that we have not, until three or four years ago have not had. And so we have a business which over a 12 or 18 month period is pretty predictable but in individual quarters within that 12 or 18 months can bump around a couple of points. And so there was nothing more in the comment than that.

Michael Sison – Keybanc Capital Markets/ McDonald Investments, Inc.

So maybe that the backlog that you are seeing in the biotech and SFAC looks better in the fourth versus the third?

Michael R. Hogan

Yes. If you ask me right now, I would be betting on a higher percentage growth in the fourth quarter than in the third.

Michael Sison – Keybanc Capital Markets/ McDonald Investments, Inc.

Okay. And then lastly, not that I am trying to get rid of you Mike, any update on the CFO search.

Michael R. Hogan

I am not the right guy to answer that question but I will be happy to let Jai do so.

Jai P. Nagarkatti

Okay. I think first of all really I should say that we appreciate what Mike has done. We thank him for the support and besides being a great CFO he is a good bud. And the search is obviously going on as we have envisioned and as we start getting more information we will share it with you. But it is very encouraging that Mike has volunteered to hang on and help through this transition.

Michael Sison – Keybanc Capital Markets/ McDonald Investments, Inc.

Okay, great. Thank you.

Michael R. Hogan

Thank you.

Operator

(Operator Instructions) At this time, there are no further questions. Do you have any closing remarks?

Michael R. Hogan

Yes I do. We want to thank everybody for participating in the call today. Looking ahead we do expect our release results for the third quarter of 2008 on October 21^st and our next conference call is scheduled for October 22^nd. Again at 10 a.m. in the morning central time. This concludes today’s conference.

Operator

Thank you ladies and gentlemen. This does conclude today’s conference call. And you may all now disconnect your line.

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