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Thermo Fisher Scientific, Inc. (NYSE:TMO)

Q2 FY08 Earnings Call

July 24, 2008, 9:00 AM ET

Executives

Kenneth Apicerno - VP, IR

Marijn E. Dekkers - President and CEO

Marc N. Casper - EVP and COO

Peter M. Wilver - Sr. VP and CFO

Analysts

Mike Dauchy - Deutsche Bank

Jonathan Groberg - Merrill Lynch

Peter Lawson - Thomas Weisel Partners

Isaac Ro - Leerink Swann

Jon Wood - Banc of America Securities

Sheng Chi Nem - JPMorgan

Operator

Good morning, Ladies and gentlemen and welcome to the Thermo Fisher Scientific Second Quarter 2008 Earnings Conference Call. I would like to introduce our moderator for the call Mr. Kenneth Apicerno, Vice President, Investor Relations. Mr. Apicerno,you may begin the call.

Kenneth Apicerno - Vice President, Investor Relations

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

Please be aware that this car is being webcast live and will be archived on our website, thermofisher.com, until August 29th, 2008. To reach the replay of the call on our website, click on investors and webcast and presentation. Please also be aware that a copy of the press release setting forth our second quarter 2008 earnings in future expectations is available in the investor section on our website, under the heading financial results.

I would like to begin 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 the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's form 10-Q, for the quarter end March 29th, 2008, under the caption risk factors, which is on file with the Securities and Exchange Commission and available on the investors section of our website under the heading SEA filings.

While we may like 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 the call, we will referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. A reconciliation of the non-GAAP financial used on this call to the most directly comparable GAAP measures is available in the press release, setting forth our 2008 second quarter earnings and future expectations and in the tables accompanying such releases in the investor section of our website at thermofisher.com, under the heading financial results. Related information is also available on the investor section of our website under the heading webcast and presentation.

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

Marijn E. Dekkers - President and Chief Executive Officer

Thank you, Ken. Good morning, everyone. I know there are number of companies in our space are competing for your attention this morning. So, thank you very much for joining us. I think you will be glad you did because it was a very good quarter. As you saw in our press release, we had another record quarter in Q2 with strong performance in all of our key financial metrics. So, let me get right to the highlights.

First, we had a really strong revenue growth quarter with a 14% increase to $2.7 billion. Adjusted EPS rose by 22% and our adjusted operating income increased 18%, and we also achieved 60 bases points of adjusted operating margin expansion, so a terrific growth quarter.

I believe our success is the result of our sound business model. As you've heard me say before, we do not run this company quarter-by-quarter focused on any one single financial goal. Instead, we work to achieve a balance of our four key financial metrics, which are revenues, operating margin, EPS and cash flow. And we believe that this approach is the best way for us to generate growth that is sustainable and creates value for shareholders over the long-term.

Our performance in Q2 puts us right where we expected to be halfway through the year and this positions us to meet our growth goals for the full year in 2008. Our results year-to-date also show that not only have we achieved our cost energy targets from the merger of Thermo Fisher, but we are right on track with revenue synergies in the three areas we have been focusing on since the merger.

You remember that the three areas of revenue synergies were one selling more self-manufactured products through the Fisher Scientific catalogs. Two, leveraging the company's scale by growing faster in Asia and three focusing specifically on our top 20 largest accounts to gain share. We are very encouraged by our success in each of these three areas. The first one that we started seeing results from early last year was selling more self-manufactured products through our Fisher scientific catalogs and the success of this has significantly added to our margin expansion in the past six quarters.

And then second, by leveraging our total company footprints, we have also seen faster than market rate revenue growth across Asia, not just in China but also in India and even in Japan. And Asia is now 13% of our total revenue versus 10% at the time of the merger, so an overall acceleration of growth in Asia of about $300 million in just over one year.

And then lastly, in the past few quarters revenue growth of our top 20 customer counts has been significantly outperforming the company average indicating that our focus on these large customers is also beginning to pay off. So we are progressing well on all these three fronts as a result of being the combined Thermo Fisher Company.

Now let me make a few comments about our key end markets. We are especially pleased with our performance given the current global economic environment. The newspaper headlines continue to point to how much uncertainty there is in the world. Again, we are not seeing any significant change from what we have reported to you so far this year.

We saw particular strength and above average growth in our scientific instruments business, our specialty diagnostics business and our BioPharma Services business. From a market point of view, our major life sciences and healthcare end markets remained strong in general with particular strength and demand from CROs. Biotech demand for research products is also very robust but demand for bioprocessing products used in drug production continues to be weak.

Our industrial markets are holding their own very nicely with high commodities pricing continuing to drive spending and investments by our customers. And then in Q2, sales in our much talked about safety catalog business were flat compared with last year and as a result did not create the headwind for us in organic growth that it did in earlier quarters.

The impact of declines we have seen in this business should be less significant going forward.

Again, I believe our size, breadth of portfolio especially our large percentage of consumables, and our global presence give us a key advantage. All of this makes us less vulnerable to market shifts. We also have the resources to continuously invest in the business to develop new technologies and penetrate new markets that allow us to capitalize some opportunities for growth.

So let me spend a couple of minutes talking about a few of the new developments in our business that will contribute to our growth going forward. First, new products, those of you who attended ASMS, the leading conference on Mass Spectrometry, know that we had a very strong showing again this year.

These instrument system are sold under our Thermo Scientific brand. The highlights included two break through systems that expand the use of high end analytical tools to more users and applications.

Firstly, our new vantage is the latest addition to our successful line of Triple Quad Mass Spectrometry system delivering up to ten times more sensitivity for our Life Sciences customers who continue to demand more accurate analysis for their cutting edge protein research.

Secondly, our new executive LCMS system on the other hand leverages our successful Orbitrap technology in a Benchtop system that is easy for non specialists to operate. It delivers the high resolution, sensitivity and mass accuracy needed to meet analytical challenges in a range of applications.

So these new systems generated a lot of excitement at the conference and the feedback since then has been extremely positive. Customers are gaining hands-on experience with them in our demonstration labs around the world and these instruments have already started shipping in Q3.

A quick word on acquisitions, we continue to augment our internal developments with acquisitions that offer complimentary technologies or greater access to new markets. You may recall last quarter, our Bio Sciences business launched our new excel Gene-Silencing Technology which extends the use of synthetic RNAi by making it possible to deliver these reagents into more types of cells.

Well, this quarter we strengthened our leadership in RNAi with the acquisition of Open Biosystems. This business which has about $15 million in revenues adds a complimentary line RNAi technologies to our existing portfolio. We can now provide scientists with the post comprehensive RNAi tool kit to accelerate the discovery of new therapies in neuroscience, immunology, stem cell science and oncology.

Just last week, our Bio Scientist business also acquired Affinity BioReagents, a small but leading provider of antibodies, peptides and proteins with revenues of $6 million. This acquisition give us new opportunities to create complete solutions for widely used research applications by combining an extensive BioReagents portfolio with our current Proteomics, 0:32, 5 offerings. We also acquired the analytical and environmental instrument businesses of Chemito to strengthen our presence in India. This is another in a series of investments we have made to expand our footprint in that growing market. And, I will ask Marc Casper, our COO, to say a few words about our activities in India. Marc?

Marc N. Casper - Executive Vice President and Chief Operating Officer

Thanks Marijn. We continue to make significant investments to strengthen our presence in India, a market we participated in with the direct presence since 2000 through our laboratory equipment and consumables business.

We began to accelerate our expansion there in 2005 when we opened our state-of-the-art demonstration laboratory in Mumbai. Since then, we have been building our commercial organization, begun construction of a large clinical packaging facility in Ahmedabad and supplemented those activities with two acquisitions in Mumbai in the past year. This is all in an effort to serve the rapidly growing life sciences and industrial markets in that country.

So what do we gain from these investments? We became the leading supplier of laboratory chemicals to research markets in India with our acquisition of Qualigence in September 2007. This business added about $25 million to our annual revenues. Our recent acquisition of two divisions of Chemito totaling approximately 10 million in annual revenues, gives us a strong position in India in Gas Chromatography and UV-Vis technologies. It is local manufacturing capabilities, and the deep sales and service presence. To me it not only allows us to better penetrate the growing analytical and environment instrument market in India, but should allow us to offer these low-cost instruments in other emerging markets.

Last, our new clinical packaging facility is on track to open in Q4, the result of a $17 million capital program we initiated last year. When completed this 150,000 square foot facility will help us to meet growing demand for biopharma logistics outsourcing services, in response to the increasing number of clinical trial patients in India. These ongoing investments that we have made at Thermo Fisher, really positions us as the leading life sciences company in India by far.

Once the clinical packaging facility is open, we'll have more than 20 facilities and offices, and roughly 625 employees across the country, putting us in an excellent position to capitalize on India's future growth. We're already seeing the return on our investments there. Year-to-date we've grown more than 40% over 2007 not including acquisitions, with a run rate for the year of approximately $125 million in revenue.

With that, I'll turn the call back to Marijn Dekkers.

Marijn E. Dekkers - President and Chief Executive Officer

Thank you, Marc. Indeed, a very exciting market for with excellent growth prospects. So let me wrap it up by reviewing our guidance for 2008.

After completing a strong first half, we remain confident in the full year guidance we gave you last quarter. We are maintaining our revenue estimate of $10.6 billion to $10.7 billion for 2008, which would lead to 9% to 10% growth over our 2007 results. And then based on our adjusted EPS performance to date we are increasing the low end of our guidance by $0.4 to a range of $3.11 to $317 for the full year. And this would lead to 17% to 20% adjusted EPS growth over 2007.

So with that I am going to turn the call over to our CFO, Peter Wilver, for his financial review. Pete?

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

Thanks, Marijn. Good morning, everyone. As Marijn said, we had another record quarter with 22% growth in our adjusted earnings per share to $0.79 compared to $0.65 in Q2 last year. GAAP earnings per share in Q2 were $0.57 up from $0.37 in the prior year's quarter, primarily as a result of improved operating performance and favorable discontinued operations. Our press release contains a detailed reconciliation between GAAP and adjusted EPS.

Revenues in Q2 increased 14% year-over-year to $2.71 billion. Organic growth was 8% excluding the favorable currency translation of 4% and acquisitions net of divestures of 2%. Organic revenue growth in the quarter particularly in our consumable businesses was enhanced by one day or close to 1% as a result of a shift in the Easter holiday to Q1, as we described on last quarters call.

Going forward, Q3 will have the same number of days as last year and Q4 will have two more days. Bookings were in line with revenues in the quarter. In the Analytical Technology Segment Q2 revenues rose 14% on a reported basis and 8% organically. In the quarter we saw strong organic growth across our life sciences and health care markets. Our industrial markets grew at below the average, but at a pace consistent with the past few quarters.

New products continue to be a growth driver specifically in our scientific instruments, environmental instruments, molecular diagnostics and life science research product lines. In the laboratory products and services segment, Q2 revenues also increased 14% on a reported basis and 8% organically. Notables in the quarter were our biopharma logistics services business which delivered mid-teens organic growth and our safety catalogue business which was flat year-over-year.

By geography, we saw a strong organic growth across all our major regions with the exception of Europe which grew in the low-single digits, again strong growth than the year ago quarter. North America grew at slightly below the company average and Asia Pacific grew in the mid-20s. The rest of the world grew at around 35% albeit from a relatively small base. Q2 adjusted operating income increased 18% year-over-year to $477 million. Adjusted operating margin up from 17.6% up 60 basis points from 17% n the year ago quarter.

The margin expansion was driven by pull through on our incremental organic revenues including increased prices, integration synergies and global sourcing and productivity initiatives. This expansion was partially offset by increased inflationary pressure in raw materials and transportation costs, slightly unfavorable business mix and 20 basis points of dilution from higher stock-compensation expense.

Analytical Technologies Q2 adjusted operating income increased by 21% year-over-year and adjusted operating margin was 21.1% up 130 basis points versus 19.8% last year. Laboratory products and services Q2 adjusted operating income increased by 14% and adjusted operating margin was flat with the prior year at 14%.

Margin expansion in this segment was negatively impacted by direct material inflation, net of pricing increases, and unfavorable foreign exchange on our European manufacturing cost base. Adjusted gross margin was 41.3% in Q2 up 30 basis points from 41% in the year ago quarter, primarily as a result of volume leverage and the impact of our sourcing and productivity initiatives.

We are continuing to see increased inflationary pressure on our raw material costs, primarily in steel, raw resin and plastics. We're also experiencing higher fuel and freight costs, a large position of which we've been able to offset in the form of fuel surcharges and increased freight billings. Direct material inflation in the quarter negatively impacted gross margin by about 40 basis points, this inflation was offset by our global sourcing initiatives.

However, we did not see the same level of margin expansion that we have seen in the past as a result of the higher inflation. We expect raw material inflation to remain a challenge for the remainder of 2008. And we put in place additional sourcing and pricing actions to offset the expected impact. However, the net result is likely to be somewhat dilutive to our gross margin rate.

Adjusted SG&A was 21.3% of revenue in Q2 down 30 basis points from 21.6% in the year ago quarter, primarily as a result of volume leverage and integration synergies, partially offset by growth investments and higher stock-compensation expense.

R&D expense was 2.4% in Q2 down 10 basis points from the year ago quarter, primarily as a result of volume leverage. Adjusted net interest expense was $22 million in Q2 down $1 million from the prior year, primarily as a result of a reduction in our net debt and a slightly more favorable interest rate environment.

Other income was a loss of $1 million down $3 million from the prior year, primarily as a result of currency translation losses on foreign entity cash, and a $1 million write-down related to our $9 million portfolio of auction rate securities.

Our adjusted tax rate for the quarter was 23.6% in line with our full year 2007 actual and 2008 forecast rates of 24%. The Q2 2008 adjusted tax rate was down 0.6% from the prior year, primarily as a result of the tax planning we implemented during 2007 and early 2008. Average diluted shares were 437 million for the quarter down 9 million from last year, reflecting the benefit of the share buyback program we initiated in Q3 2007 and completed last quarter.

In terms of balance sheet performance, we ended the quarter with $1 billion in cash and investments up $272 million from Q1, as our free cash flow and proceeds from stock-options were partially offset by cash used for acquisitions. Our total debt was $2.2 billion essentially flat with Q1. We had strong working capital performance in the quarter.

Accounts receivable days sale outstanding was 53 days down one day from the prior year and down three days from Q1 and inventory days of supply was 72 days down four days from the prior year and down three days from Q1. Year-to-date Q2 cash flow from continuing operations was $590 million and after deducting net capital expenditures of $104 million free cash flow from continuing ops was $486 million.

Moving on to our 2008 guidance, we are maintaining our previous revenue guidance of $10.6 to $10.7 billion, which represents 9% to 19% growth versus our 2007 actual revenue of $9.75billion. This guidance reflects current exchange rates, incremental revenues from our recently announced acquisitions, and a reduction of approximately $20 million related to the recent two-year extension of our health care catalog businesses contract with Inverness Biosite.

The 2008 earnings impacts related to the Biosite product contract revenue reduction is less than $0.5. In 2009, we expect an incremental reduction of approximately $60 million in revenue related to this contract, for a total annualized reduction of approximately $80 million in revenue from our current run-rate. In terms of adjusted EPS, we are increasing the low ends of our guidance by $0.04, resulting in our current guidance of 3.11 to 3.17, which represents 17% to 20% versus the 265, we recorded in 2007.

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

Question and Answer

Operator

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

Mike Dauchy - Deutsche Bank

Hey guys, Mike Dauchy [ph] here for Ross. He is another call, but congratulations on a great quarter.

Marijn E. Dekkers - President and Chief Executive Officer

Thanks, Mike.

Mike Dauchy - Deutsche Bank

I want to talk a little bit about some of the raw material stuff you mentioned, some of the sourcing initiatives you are taking. How quickly will those take shape and could you talk a little more about those versus the pricing impact you have and some of the offsets you're making?

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

Well, in terms of the sourcing initiatives, those are something that we have been working on since the beginning of Thermo Electron eight years ago. So, it is not anything new for us, but we are initiating some incremental actions to try to help offset some of the inflation that we are seeing. And as you mentioned, we are raising prices in some specific businesses to try to offset that. What we expect to see is, probably a slightly negative impact in Q3 in terms of the net of those actions and then in Q4, to essentially make it all backup in the quarter with maybe a little bit extra to offset what we missed in Q3. So in terms of dollars, we are talking in the single millions of dollars of hurt in Q3 and maybe a couple of million benefit net, when you get to Q4.

Mike Dauchy - Deutsche Bank

That's what we saw, but just wanted to clarify. And then just talk a little bit more about the emerging markets. China has been a stronger market for you post Thermo Fisher merger and India is showing tremendous growth. Can you talk about a little more about any more of the emerging markets you are seeing pockets of growth and what are the next strong opportunities for you?

Marijn E. Dekkers - President and Chief Executive Officer

Yes, Mark this is Marijn. Obviously, China and India have been very good. Other areas are places like the Middle East. Quite a lot of investment going into new universities that are being built in Saudi Arabia, for instance, or just in general, you know, with supporting infrastructure with hospitals, universities, and then also petrochemical industries that is doing very well there. We are also seeing very good demand in countries that are particularly strong in mining, minerals. So, places like Australia, Chile, Russia who are booming right now from a materials point of view. We see strong demand for instrument systems that help them analyze, what it is that they are mining.

Mike Dauchy - Deutsche Bank

Great. Well, thanks again and congratulations again on a great quarter.

Marijn E. Dekkers - President and Chief Executive Officer

Thank you.

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

Thanks.

Operator

Our next question comes from Jon Groberg with Merrill Lynch.

Jonathan Groberg - Merrill Lynch

Hi. Good morning. Thank you for taking the call.

Marijn E. Dekkers - President and Chief Executive Officer

Good morning.

Jonathan Groberg - Merrill Lynch

Congratulations as was said. By all indications, it was a phenomenal, phenomenal quarter. I think one question people will have is probably, if anything that would put a little bit of a lid on a great quarter is the guidance that you gave. So, can you maybe just explain, are you seeing anything different in your and, is this kind of a cautious view just given, you said the headline news you read in the newspapers and not knowing what's going to happen in terms of the top-line that you're maintaining given the very good growth obviously this quarter and then maybe some of the margin things you've talked about on the bottom end. I'm just trying to better understand if you're expecting things to slow a little or if this is just kind of cautious given you want to be conservative?

Marijn E. Dekkers - President and Chief Executive Officer

Jon, I will take the question. So that from the 30,000 feet point of view, we did raise the bottom end of our EPS margin by $0.04 and being two quarters into the year, we feel comfortable about that. We raised our overall guidance range by $0.02 last quarter, so we are sitting in the middle of the year. We have had a very good first half. We are confident that we have a very good second half. But at the same time with the material, raw material pressure, our ability to pass on pricing increases, the overall uncertainty around the industrial economy, there is enough uncertainty in the world and therefore insubtleties [ph] around our P&L that we say, lets just stay where we are for now.

Jonathan Groberg - Merrill Lynch

Okay. And how... can you just describe the process... there was a lot of concern going in about the rising cost of oil-based products. Can you maybe just describe, the lag of, how that works? For example, oil prices have fallen quite dramatically over the last little bit.

Marijn E. Dekkers - President and Chief Executive Officer

Yes.

Jonathan Groberg - Merrill Lynch

And so how that would kind of flow throughout a given year and how you have kind of prepared for it at the beginning of the year and where you are today?

Marijn E. Dekkers - President and Chief Executive Officer

Yes. The way it works is, these price increases work themselves through the system, very often relatively slowly. For instance, oil has been going up for quite awhile but it was only two or three months ago that, for instance, a company like Dow Chemical said, we just cannot take these increases any more and not really very aggressively try to pass them on. So, they came out with a 20% to 25% price increase across the board, I think it was three months ago. A month later another 20% to 25% price increase on certain plastics resin across the board. So, they reached a point where they said, okay, some contracts are expiring, we need to start passing this stuff on. And that's when we as resin buyers become affected by it pretty much sometimes six to nine months later because it gets held up with the plastic resins manufacturer, okay.

So, these pricing systems work themselves through the system from one to the next, to the next supplier customer relationship. We are right now in the middle of the storm of getting these price increases from our suppliers and our job is to find ways to pass these increased costs on to our customers. And that also leads to some delay again, more with some customers than with others. But if we have contracts, we cannot just abruptly increase prices. So, it takes time and that's why oil now is suddenly going down by $20. Isn't going to rapidly reverse it.

Jonathan Groberg - Merrill Lynch

Okay. I didn't know, if as you see oil coming down if some of the price increases they have announced maybe don't stick because customers start saying, no, look, oils coming down. We have our own demand issues. I assume you are not, more a price taker in general on some of these resin-based products?

Marijn E. Dekkers - President and Chief Executive Officer

Yes. I think everybody understands how this works itself through the system. The increase in resin prices have been so well documented that all of our customers know that this is reality and it is not something that we are making up. This is really there. And that's also why sometimes having these price increases take hold, takes some time because customers want to be convinced that indeed you are as a supplier experiencing that cost pressure. I don't think there is any question.

Jonathan Groberg - Merrill Lynch

Just relative to Q2 then of what you saw, and what you are expecting, Pete, as you were describing in Q3, it seems like you are impacted to some degree in Q2, but you were able to have start pretty good gross margin expansion. Do you expect a bigger impact in Q3 relative to Q2?

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

I think the impact will be slightly bigger in Q2, excuse me in Q3 than it was in Q2. But at the same time we have already initiated some mitigating actions. So, it's not going to be a dramatic change. Again, talking single digit millions probably, which on our revenue base is not a huge margin impact.

Jonathan Groberg - Merrill Lynch

Right.

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

The thing to keep in mind though just, one of the comments I made about it being dilutive to our gross margin. If we get 10 million of price increases for raw materials, we pass it 100% to the customers, it doesn't affect our gross margin dollars, but it does dilute our rate because we basically get revenue at zero margin.

Jonathan Groberg - Merrill Lynch

Okay.

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

So, it is not hurting our guidance in our earnings per share, but it affects the rate a little bit.

Jonathan Groberg - Merrill Lynch

And, then last question. You mentioned that the Biotech Manufacturing business, your Bioprocess business, you still expect that to recover some here in the second half?

Marijn E. Dekkers - President and Chief Executive Officer

Yeah, I think that at some point, maybe not in the third quarter but certainly in the fourth quarter the comparisons are going to get easier, because then we will, this has been going on for two, maybe three quarters. So I think, in other quarter, probably relatively weak in Q3 and then Q4 should be better.

Unidentified Analyst

Thanks Marijn. Congratulations, very outstanding quarter.

Marijn E. Dekkers - President and Chief Executive Officer

Thank you Jon.

Operator

Our next question comes from Derik De Bruin with UBS.

Unidentified Analyst

Hi guys this is Dennis for Derik.

Marijn E. Dekkers - President and Chief Executive Officer

Morning.

Unidentified Analyst

Morning. Just thinking about the use of cash. Obviously your, guidance assumes no share purchases, but you announced the buyback authorization in I believe last August. I was wondering whether you guys might be willing to comment on whether we could see something similar in terms of timing this year.

Marijn E. Dekkers - President and Chief Executive Officer

We don't really want to comment on our share purchase strategy. I can make a general comment on uses of cash. Our top priority for the use of cash is to do acquisition and you are seeing, we have been doing some smaller strategic acquisitions that are well positioned in terms of technology additions or access to markets like what Marc Casper was talking about with India. So that's the use of our cash and that's the preferred use of our cash, but we don't exclude other buyback programs. There is just not one ongoing right now.

Unidentified Analyst

Okay, thank you. Looking at cash again, I know that you said that you had an interest expense reduction on the quarter, but it also looks like interest income came up by about 50%. I was wondering whether that's due to anything more than just simply cash in the bank?

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

No, as I said there is a slightly more favorable interest rate environment, but it's primarily the incremental cash.

Unidentified Analyst

Okay thanks.

Marijn E. Dekkers - President and Chief Executive Officer

Thank you.

Operator

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

Unidentified Analyst

Good morning guys. This is actually Matt for Quintin. Congratulations on the quarter.

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

Thank you.

Marijn E. Dekkers - President and Chief Executive Officer

Thank you, Matt.

Unidentified Analyst

Marijn just quickly, touching on some of the markets could you talk a little bit about what you are seeing on the academic market front?

Marijn E. Dekkers - President and Chief Executive Officer

Yeah. I mean, think that academic is, it's okay. It's not super robust. NIH is not really a fantastic number. It is sort of flattish as you know. But that's said, I think that we are in a good place in terms of getting a good portion of what NIH is spending because a lot of the spending goes to new life sciences applications, biomarkers, Proteomics, RNAi technology, stem cell research to some extent. And being, in those sort of hot spots right now helped us get us maybe more than a fair share of the NIH funding overall.

And I have also made the comment in the past, something we don't really keep track of because it's so hard to keep track of it, but it plays definitely a role, is that there are a lot of charitable gifts, large charitable gifts to life sciences research, healthcare research, universities, new laboratories that are being built with significant money donated by wealthy people that fuels the demand for laboratory equipment, laboratory instruments. And we don't really count it, but it is a really, sort of nice part of the academic growth story.

Unidentified Analyst

Thank you for that color. Just moving back to Asian growth has been really nice here. Have you been able to kind of draw a line in terms of how the catalog release in China is favorably impacting that business here and kind of the early returns there?

Marijn E. Dekkers - President and Chief Executive Officer

Yes. The catalog that we came out with three months ago is not really impacting these phenomenal numbers at this point. It's way too early for that. I mean, we hope in the future that it will begin to contribute, but it has contributed a little bit in the second quarter but not in a meaningful way to affect these numbers. The catalog is pretty simple. Legacy Fisher had a very, very tiny position in China and in India from a catalog point of view. And we have aggressively, first in China gone out and put a catalog together in the Chinese language and we expect that over time we will start gaining share there in a market that is about, we estimate $800 million on laboratory consumables at the moment just in China.

Unidentified Analyst

Thank you for that and congratulations again.

Marijn E. Dekkers - President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Peter Lawson with Thomas Weisel.

Peter Lawson - Thomas Weisel Partners

Good morning. I wonder if you could talk about the turns in the pharma at the moment with the kind of weak Biotech funding market and cutbacks in spending that are affecting you.

Marijn E. Dekkers - President and Chief Executive Officer

Peter, could you repeat the question, please.

Peter Lawson - Thomas Weisel Partners

I wonder, if you could talk about the turn in the Pharma market with a weak Biotech funding and cutbacks in spending? How has that been affecting you?

Marijn E. Dekkers - President and Chief Executive Officer

We have not really seen weakness in Biotech spending other than what I was commenting on in Biotech processing for the production of drugs. But from an R&D demand point of view of view it has been very robust. And pharma, I was mentioning we are growing significantly with our top 20 customers. A lot of them are obviously large pharma and we are doing very well on average with large pharma customers. We believe that we are gaining share with those customers. So we may be seeing some conservativism with large pharma in very high ticket capital good items in Q2, but other than that, pharma demands have been very good.

Peter Lawson - Thomas Weisel Partners

What's the M&A environment like, and what do you think the likelihood is of further consolidation in the Life Sciences spaces going to be going forward and what kind of impact, I'm thinking about coming from ABI and (inaudible) Bill.

Marijn E. Dekkers - President and Chief Executive Officer

Well, I think... and I have always said this... when I joined this industry eight years ago, I couldn't believe how fragmented the industry is, how unconsolidated, how many players there were. Now its eight years later, I still cannot believe how fragmented this industry is. It's less fragmented than eight years ago, but compared to any other industry it's still a highly fragmented industry quite honestly. Just goes to one of the trade shows, Sitcom or Analytica that happened just a few months ago and you walk around and say my goodness how can all these company exist in one industry? So I believe that there will be further consolidation going forward. It just makes sense from an industry dynamics point of view.

Peter Lawson - Thomas Weisel Partners

You are kind of expecting to see more kind of ABI and (inaudible) deals going forward?

Marijn E. Dekkers - President and Chief Executive Officer

Well, I don't know. I can't comment on exactly what would happen, but I would say in general some consolidation will continue I would think.

Peter Lawson - Thomas Weisel Partners

Okay. Thank you so much. I will hop back into the queue.

Marijn E. Dekkers - President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Isaac Ro with Leerink Swann. Issac Please go ahead with your question. Could you press your mute button.

Isaac Ro - Leerink Swann

Yeah. Thanks for reminding me. I think, I was thinking the question. I think in the past month, you talked a little bit about having a couple quarters with visibility ahead of material economic slowdowns, and I know it is a very macro type of question, but I'm wondering, would you still say that's the case today and if so how do you feel about 2009 for your end markets in the industrial segment?

Marijn E. Dekkers - President and Chief Executive Officer

Yes, this is on a certain segment of our products and process instruments, where we provide instrumentation that goes into either capacity expansion of existing plants or new plants that are being built to basically do the in-line quality control of say a refinery or something like that, basically a chemical process. And I would say that we see no decline in terms of the next two quarters in that area. And we relate that to just still exceptionally high-commodity pricing. People have decided to expand their capacity, and they've decided that three months ago, and they are drawing up the plans, they begin to order this equipment.

But the lead time on that is sometimes six months or so because they can only receive that equipment when they have made some good progress with building the plant. So we come in as a last moment sort of just before the plant gets started up. And that's why we have some visibility from a backlog point of view. But those decisions have been made already in the past. We just know that our sales will be there for the next few quarters in that particular area. And as I said, you know, this continues to be strong because commodity prices are high.

Isaac Ro - Leerink Swann

Sure, okay. Thanks. And then, just regarding the Asian marketplace. Could you qualify maybe a little bit how that growth is driven when you compare sort of new lab build outs versus maybe incremental share gains? And then secondly on that question, how would you characterize the nature of your product mix there, has that evolved in a meaningful way in the last two or three years?

Marijn E. Dekkers - President and Chief Executive Officer

I'll start with the last one first. Given the tremendous focus that we've had in the legacy thermo business on places like China, the mix in terms of scientific instruments and laboratory equipment is higher in those countries than laboratory consumables. Okay, now, that will gradually change. But right now, I would say the mix is richer in sort of the legacy thermo electron product line. And it is a very, very wide range of applications there in China.

To begin with the obvious, environmental applications are very, very, key, the build out of life sciences laboratories, university laboratories, hospitals is key, and the third one, that's very strong right now, is anything that's related to food quality monitoring, with some of the hiccups that the Chinese exports have had in terms of food safety. So it's a wide range of applications. And I would just say that China is really strong across the border.

Isaac Ro - Leerink Swann

Thanks a lot.

Marijn E. Dekkers - President and Chief Executive Officer

Thank you.

Operator

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

Jon Wood - Banc of America Securities

Thank you. Pete, given the better working capital performance in the quarter what's keeping you from raising the cash outlook for the year?

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

I should have expected that question from you, Jon.

Jon Wood - Banc of America Securities

Better than ten questions on the mid-single millions of inflation issue.

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

Right. It's basically I've given guidance of about $1.2 billion of cash flow for the year. If we're going to beat that number, it will be in the working capital area. But we do have a lot of headwind versus last year on taxes, that's we're just paying more cash taxes this year than we paid in 2007. So at this point the working capital metrics are better. But if you look at the cash usage on working capital it is actually up significantly versus last year.

At this point, I'm not sure whether that's because of where the quarter ended, which this year we kind of got dinged both in Q1 and Q2, then the last calendar day was outside of our fiscal calendar. So if things go well in Q3 I will raise the number.

Jon Wood - Banc of America Securities

Okay. And then, CapEx I mean you're running a bit below annualized guidance.

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

Yes.

Jon Wood - Banc of America Securities

Are you still looking for 230 to 240?

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

Yes, it's definitely going to be in that range, 250 I think is the guidance that I've given in the past.

Jon Wood - Banc of America Securities

Okay. And then Marijn, back on the momentum in the top-20, can you give us or quantitate somewhat that growth profile. I mean is it in excess of 10% organically?

Marijn E. Dekkers - President and Chief Executive Officer

Yes, I want to be careful with that because it's such a small number of customers. So competitively I want to be careful with that. But if I say we have 8% organic growth. If I say that we are significantly outgrowing the average of the company I think you can conclude that it's higher than 10.

Jon Wood - Banc of America Securities

Okay. And where is... I mean where is that share coming from, are you consolidating more product to the channel, is it coming from other distributors, what's your sense of where that's coming from?

Marijn E. Dekkers - President and Chief Executive Officer

I think it's a very broad based growth. First of all I think that those large customers want to consolidate their purchasing with fewer suppliers. We are obviously there with a very focused sales executive team at each of these customers to make them very aware of what Thermo Fisher can offer, help them make it easier to do business with us. So I think just our focus and our size is making them do more business with us. We go really the extra mile for these plenty of customers. So, that's one. And then I think there is also a number of programs that we have initiated around standardization at some customers where you say we can help you standardize your purchases. Have less fragmentation in the types of products you buy and that is also beginning to contribute.

Jon Wood - Banc of America Securities

Okay. Thanks a lot.

Marijn E. Dekkers - President and Chief Executive Officer

Okay. Thank you.

Operator

Our next question comes from Sheng Chi Nem [ph] with JPMorgan.

Sheng Chi Nem - JPMorgan

Hi guys, sitting here Tycho today. Thanks for taking the question. First question is for your, going back to your top 20 accounts. Could you to the extent that you can breakout kind of the rough breakdown of the accounts by end markets in geography.

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

I will try. It is a typical suspect... the usual suspect, I guess. It is basically when you say large pharma, large Biotech are in there. And some of the larger reference labs. So, I would say probably 65% of that is in the US and 35% in Europe.

Sheng Chi Nem - JPMorgan

And then could you also comment on your overall mass spec business, given kind of the new product line, to increasing product line to how done all those things competitively. If it is taking market share and also kind of comment on pricing?

Marijn E. Dekkers - President and Chief Executive Officer

Yes, I mean mass spec is, it continues to be a very good story for us. As I was mentioning in my comments we came out with again some exciting new... new platforms at ASMS, which we have had very good reaction to. Now, I think that in terms of share... I believe we are gaining share in this market. It is in the end hard to know because most competitors including us don't specifically comment on growth in mass spec, but from what we are seeing and what we are hearing and the feedback we get at the ASMS surveys, we believe that we are continuing to gain share.

And have done so quite honestly for the last four to five years. I think from a pricing point of view this is not a price sensitive market in general with maybe a few exceptions in some certain industries or certain product lines. But in general life sciences researchers are very keen on having the best instrumentation and why do all the work if you then put your sample into mass spec, that doesn't give you the answers that are truly available today. So, there is a strong demand from the high end researchers to really want to have the best possible equipment. And that drives the replacement cycle that works in our favor.

Sheng Chi Nem - JPMorgan

Great. Thank you.

Marijn E. Dekkers - President and Chief Executive Officer

Okay. Thanks.

Operator

[Operator Instructions]

Marijn E. Dekkers - President and Chief Executive Officer

Okay. No more questions?

Operator

I'm not showing any questions.

Marijn E. Dekkers - President and Chief Executive Officer

Okay. All right. Let me just make a quick closing comment. As you've heard, record performance in Q2, very strong first half. We believe as a result of that we are well positioned to meet our growth goals for the year. We continue to invest in new products and new markets that will contribute to our growth in the future. And want to thank you for your support for being on the call today and we look forward to reporting on our progress again after Q3. So again, thank you for listening.

Operator

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

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Source: Thermo Fisher Scientific, Inc. Q2 2008 Earnings Call Transcript
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