Scully Royalty Ltd. (SRL) Q3 2007 Earnings Report, Transcript and Summary

Good afternoon. My name is Holy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Millipore Third Quarter Earnings Release Conference. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to Joshua Young, Director of Investor Relations. Please go ahead sir.

Thank you, Holy. Good evening everybody. I would like to welcome everyone to Millipore's third quarter earnings conference call. My name is Joshua Young, Director of Investor Relations at Millipore. Joining me as speakers on today's call are Martin Madaus, Chairman, President, and CEO; and Charlie Wagner our Chief Financial Officer. In addition to the earnings release, we issued earlier today, we will be referencing a slide presentation, as part of today's call. The presentation can be viewed by clicking on the webcast link on our homepage, or by accessing the new Investor Relations website that we launched last week. A PDF copy of the slides will be posted to our website after the call. We will also be highlighting non-GAAP information, a reconciliation of our GAAP financials to our non-GAAP financial measures is included in our earnings release and posted on our website. Before we begin, I will make the usual Safe Harbor statements that during the course of this conference call, we will make projections or other forward-looking statements regarding future events or the financial performance of the company that involves risks and uncertainties. The company's actual results may differ materially from the projections described in such statements. Factors that might cause such differences include, but are not limited to, those discussed in today's earnings release and in our Form 10-K as well as other subsequent SEC fillings. Also note that the following information is related to current business conditions and our outlook as of today November 1, 2007. Consistent with our prior practice, we do not intent to update our projections based on new information, future events or other reasons prior to the release of our fourth quarter 2007 financial results. Now, I would like to turn the call over to Martin Madaus

Thanks Joshua. Good evening everyone. I would like to begin by covering the highlights of our third quarter performance. First, we continued our trend of solid overall financial performance. Excluding changes in foreign exchange rate, we grew revenues 8%. We also increased our non-GAAP operating margin by 200 basis points to 20.6%. For the past several quarter, we have established a strong trend of year-over-year improvements in our operating margins. And now through the first nine months of 2007 our non-GAAP operating margins are up 210 basis points over the same period last year. Second, we had an outstanding quarter of cash flow performance. We mentioned earlier this year that we expect a significant increase in our cash flow during the second half of 2000, and that is evident by the $95 million in cash flow from operations we generated in Q3. Third, after a relatively slow first half of 2007 our bioscience division had an outstanding quarter. Excluding currency the division grew 15% in Q3. This high level of growth was consistent with the acceleration we forecast for the second half of the year and was helped by the higher growth products we acquired from Serologicals. The division is benefiting from strong international growth also from fast growing markets, such as, protein research, cell biology business and drug discovery. Also, bioscience sales organization, the bioscience sales organization continues to increase their proficiency selling our broader product portfolio. We are seeing a positive impact from the many new marketing and sales are thriving [ph]. After 12% organic revenue growth in the first half of the year, the bioprocess division experienced a slowdown, actually but it's a slowdown that we expected in Q3. So, excluding currency the division grew 4% in the quarter and this slowdown is due to division's largest customers significantly reducing their raw material purchases in the second half of 2007. The lower growth is limited to a handful of US biotech customer is the result of very company-specific situations, because outside these few larger customers, the overall biotech industry remains healthy and we experience very strong growth in Europe and in Asia. So, overall, I would say, the key developments of the third quarter highlight the strength and the new balance of our business, the importance of the new balance can be seen in our year-to-year... year-to-date performance. In the first half of the year the dynamic growth of the bioprocess division offset lower growth of the bioscience division as we finished the Serologicals integration. Now we are seeing very strong growth in bioscience offset by slower growth and bioprocess. And with a great expanded bioscience business, we have opened the door for much bigger growth opportunities and we have a much more diversified product portfolio. I believe this puts us in a much better position to compensate for the inevitable quarterly fluctuations in our bioprocess business while still delivering very attractive profitability improvement and cash flow expansion. By strengthening our industry leadership, we now have a business portfolio that's more balanced across a broad... vast section of very attractive life science markets. So next, I would like to move into some of the details of the third quarter. We reported $371.2 million in Q3, which represents 12% growth. Excluded changes in foreign currency you get to 8% growth in the quarter. On next slide, on this slide I show our revenue growth over the past six quarters. You can see overall revenue growth has been very consistent during this time despite fluctuations according to [ph] from our two division, so we have averaged approximately 8% to 9% organic revenue growth which I believe is very competitive versus our peers in the life-science industry. On the bottom-line, we reported non-GAAP EPS of $0.83 which represents year-over-year earnings growth of 28%. Again, I think this level of earnings looks very good, and is example of a significant leverage we have in our business. Key highlight of Q3 was the performance of the bioscience division and excluding changes in foreign exchange rates division, generated revenue growth of 15% in the quarter. The revenue acceleration was in line with our outlook for bioscience to have a strong second half of the year. And the division is clearly now benefiting from the growth of products we acquired from Serologicals and it has been now 12 months since the completion of the acquisition and the contribution of the high growth product, for example, stem cell media, biomarkers, and immunoassays. They are really helping us to accelerate the overall growth of the division. There were also several other reasons for our strong Q3 performance in bioscience. One of them is the completion of the Serologicals integration at the end of Q2 allowed us to focus much more on time with the customer and also driving sales force productivity. The overall bioscience market also remains very strong, particularly in international markets and during Q3 we saw a very strong performance and very strong demand for our Laboratory Water Products in Europe and in Asia. And our Drug Discovery business generated outstanding growth in the quarter; and as part of this business unit we now offer a compete range of compound screening services, state-of-the art immunoassays and biomarker. Life-science, in our life-science business unit, which is roughly half of the division's revenues, we continue to improve in the third quarter. And particularly I was impressed with the strong training promotion efforts. Every week we are holding more seminars to train both our customers and our field organization about our new capabilities. We talk about our broader product portfolio in life-science. On this slide you will see that I have highlighted our application handbooks for cell signaling immunodetection and also cell biology. Handbooks are now in our customers' hands and well received by our customers and that's one way for us, very effectively, to increase awareness about the new products and services that Millipore now offers. We are pleased with how our life-science business unit has responded to our efforts to increase growth, but we still recognize that we have quite a bit of room for improvement and we can drive better growth in a number of product lines. So, in summary, for Bioscience, our over all Bioscience performance, we generated a very strong result in Q3, I'm pleased with the results, but also realize its only one quarter performance and we still have significant amount of work to do to fully capitalize on the many opportunities that we have in that division. Moving on, turning on to Bioprocess, the slowdown we have predicted for the Bioprocess business in the third quarter occurred. After 12% of earning growth and over six month to a year [ph], organic growth slowed down to 4% in Q3. Year-to-date, however, to point that out, we had 9% organic growth for Bioprocess. As I mentioned earlier, the slower growth we are seeing in the second half of the year is related to a handful of large biotech accounts in North America. Due to individual, I would say very company-specific factors, these customers are significantly reducing their spending in order to lower the inventory increase the cash flow and while we have planned for the slowdown, their suddenness and magnitude of the reduced spending was greater than we expected. So these large biotech customers they have implemented a number of actions such as laying off employees, temporarily shutting down plans, reducing the number of manufacturing campaigns, and also, in some cases, delaying expansion plan. Also there was only one new biologic drug approved in 2007 by FDA and the impact of new drug approvals has not been as significant as we have seen that in previous years. Large biotech is most important end market and in Q3 we see the impact, changes going to happen in our business, but as I mentioned earlier, these issues are restricted to small number of large biotech companies in the US. And I do want to stress that it's very important to note that our business in Europe and Asia continues to generate double-digit growth and the outlook, the outlook for the worldwide biotech industry remains very healthy. Millipore will exceed in the year [ph] in biotech manufacturing. We are well positioned to benefit from the continued strong investment that any Pharma and biotech companies are projecting over the next five years. And for us now it's really an opportune time to increase our market share of key biotech accounts. Customers right now, they are looking for areas to increase their efficiency, reduce the number of suppliers and I believe we have the ability, like no other company, to displace our competitor's product. Additionally, very much highlighting our service capability as some of these customers are looking to outsource key activities to reduce cost. Large number of new and differentiated products and services that we have launched and we will be introducing. We think that our market position will actually be stronger then ever in the future. So, in summary, bioprocess performance we saw the slowdown as we expect in Q3 but the magnitude and suddenness of the slowdown was greater than expected. We expect our US biotech business will continue to remain difficult for the remainder of '07 and into 2008. Despite this we believe the overall biotech industry remains very healthy with our large number of new product launches, we are better positioned than ever to capitalize on the most attractive segment of the Pharma industry. Next, a few words on our new brand and website that we also launched in Q3, before I turn it over to Charlie. We launched our new Millipore brand in September. The new brand is significant because it represents how much the Company has been transformed for the past few years. We are stronger much more energized and more capable company with a much bigger set of opportunities. Our new tagline 'Advancing Life Science Together' represents what the new Millipore is all about. Helping customers to advance their research development production activities for our product services and closed customer relationships and if you look closely you will see that the new logo, the big M, visually presents two people holding hands. A separate, but related project is... to the brand, is our completely restructured new website. The website has a much more intuitive design and navigation, so customers or any visitor can find what they're looking for in just a few mouse clicks. And more importantly the website offers much more content. I think there are 250,000 pages and improved e-commerce functions for customers. And since we are such a knowledge-based and knowledge intensive business, we believe that these improvements will help our efforts to increase sales in both divisions. Also be providing new learning centers and collaborative tools to help scientists navigate to difficult issues that they maybe working on. So we expect the traffic to double in about a year and this overall will help to increase the awareness for our new capabilities and brand of portfolio. With that I'd like to turn it over to Charlie Wagner now. Charlie?

Thanks Martin. I'll now provide an overview of our Q3 financial performance beginning with the discussion of our GAAP performance in the quarter. Q3 2007 diluted earnings per share were $0.66 which compared with $0.27 last year, we reported revenue growth of 12% over 2006, including 4% from changes in foreign exchange rates. Adjusting for currency, revenue growth in the third quarter was approximately 8%. This growth rate includes a full quarter of results from Serologicals in 2007 compared to 11 weeks of results in the third quarter of 2006. Our gross profit margin was 54.4% which was up significantly from 48.7% in Q3 2006. In addition, to lower supply chain initiative cost and lower cost relating to the Serologicals acquisition, gross margins benefited from a higher percentage of our revenues coming from Bioscience which has slightly higher gross margins. Additionally, we benefited from savings generated form our on going global supply chain initiatives. Our Q3 2007 GAAP operating profit margin was 15.5%, up significantly from our Q3 2006 operating margin of 8.9%. In addition to higher gross margins, SG&A and R&D spending showed improved operating leverage. Our GAAP performance in the third quarter also benefited from a $13 million year-over-year reduction in pretax cost relating to one-time items. These reductions included lower cost and expenses resulting from our supply chain initiatives, Serologicals integration and restructuring and business acquisition, inventory, fair value adjustments. This reduction was partially offset by higher amortization of purchase intangibles in the quarter. The positive affects of lower acquisition and integration related expenses improved the operating leverage and the recognition of a previously unrecognized $2.8 million tax benefit, all caused EPS to increase $0.39 to $0.66 in the 2007 third quarter compared with $0.27 last year. Now I'd like to turn to detailing the items listed in our GAAP to non-GAAP reconciliation in our earnings release. Non-GAAP earnings for the 2007 third quarter excluded pretax costs and expenses amounting to $19.1 million, down $5.4 million sequentially, and as I mentioned earlier, down $13 million year-over-year. In Q3 these reconciling items included costs associated with our supply chain initiatives totaling $2.5 million. Serological integration expenses of $2 million and amortization of purchase intangibles of $14.6 million. We've also excluded the $2.8 million tax benefit I mentioned earlier from our non-GAAP results. On the next slide, we show our Q3 2007 non-GAAP operating results, we reported EPS of $0.83 up 28% from last year's third quarter. Martin already provided a divisional view of our revenue dynamics, so I'll add some color from a geographic perspective. Excluding the effects of foreign currency translation, revenues in the Americas were flat in Q3, primarily due to the softness we experienced in bioprocess. Europe grew 15% and Asia Pacific revenues grew 17% in Q3. The strength in Europe and Asia is due to solid economic fundamentals in these regions and continued investment in life-science research and biopharmaceutical manufacturing. Our 2007 Q3 non-GAAP gross margins of 55.9% increased year-over-year by a 100 basis points. Gross margins were positively affected by an improved business mix, partly attributable to higher percentage of our revenues coming from our bioscience division and partly by operating efficiencies. Non-GAAP SG&A expense represented 28.2% of sales compared to 29.3% of sales in Q3 2006, an improvement of 110 basis points and R&D spending represented approximately 7.1% of sales on both GAAP and non-GAAP basis in Q3. Our non-GAAP operating margin of 20.6% is a 200-basis point increase over last year's third quarter. The increase is driven by our higher gross margin and increased SG&A leverage. Our non-GAAP tax rate in Q3 was approximately 22.9%. Our tax rate was lower in Q3 due to a higher proportion of our profits coming from Ireland, where we have a lower tax rate. A little over two years ago, we committed to increasing our non-GAAP EBITDA margins by 400 basis points between 2005 and 2009. Our goal was to generate EBITDA margins of 25% or more for all of 2009. And since FAS 123R did not exist at the time, the target did not include the effect of stock option expense. Through the first nine months of 2007, our non-GAAP EBITDA, excluding FAS-123 costs, is 25.2%. In only 2.5 years or roughly half the time we thought it would take, we've exceeded out 2009 goal for profitability. On the next slide, I show our GAAP results for the first nine months of the year. We have grown revenues by 29%, which includes a 4% positive benefit from currency translation and a 16% increase from acquisitions. The Company in both divisions grew organically at 9% through the first nine months of the year. Our higher GAAP profitability was driven by higher gross margins and the lower one-time expenses I mentioned earlier. On the next slide, I show our nine-month non-GAAP results. Non-GAAP operating margins have increased 210 basis points through the first nine months of the year. Most of this improvement has been from SG&A leverage. SG&A expenses are down 170 basis points as a percentage of sales compared to the same period last year. Our non-GAAP gross margins are also modestly higher as well. Cash flow from operations during the quarter was $95 million which represented a year-over-year improvement of approximately $39 million. The primary driver of this increase was the year-over-year improvement in our profitability, but we also managed cash collections, disbursements and balances to maximize cash available for debt reduction in the quarter. During the quarter we paid down approximately $119 million of our long-term debt and will continue to be focused on cash flow improvement and debt reduction over the next several quarters. At the end of the third quarter, net accounts receivable were approximately $296 million, representing 72 days outstanding which is up two days from last year's third quarter and flat sequentially. Inventory at the end of the third quarter was approximately $277 million, representing a 149-days of supply which is down one day from last year's third quarter but up 18 days from last quarter. Sequentially higher inventory days of supply were partially attributable to the lower volume in our bioprocess sales and partially attributable to higher safety stock levels in bioscience. While there are very clear business reasons for our current inventory levels, reducing our inventory levels would be an increasing focus of the Company in coming quarters. Depreciation and amortization was $31.5 million in the third quarter of 2007. Capital expenditures were $24 million, down $2 million from last year's third quarter. And now, I would like to turn to our guidance. We are not making any changes to the total company guidance we provided last quarter. Excluding changes in foreign currency and acquisitions not in the base period, we expect the Company to generate total revenue growth of 7% to 8% for the full year 2007. We expect to be on the low end of our EPS guidance range of $3.33 to $3.48 per share and we still expect to generate approximately a $100 million in free cash flow for the year with free cash flow defined as cash flow from operations less capital expenditures. I will close by saying that Q3 was a very good quarter, overall, of financial performance for the company. We stated during our recent Investor and Analyst Day, in September, that we generate an attractive combination of revenue growth, profitability improvement and cash flow expansion in the second half of the year. You will see on this slide that we delivered this combination in the third quarter: 8% revenue growth, 200 basis points of non-GAAP operating margin expansion, 28% growth in non-GAAP earnings per share, and a 71% increase in cash flow from operations. These are all very solid numbers. We have a very strong business that is better balanced and more diversified than ever before. This balance was very important this quarter, as we saw significant changes in the performance between our two divisions, but still delivered on our financial targets and performance for the company as a whole. We believe this balance makes Millipore an attractive investment for investors who want to participate in the long-term growth of both the life-science research and biopharmaceutical manufacturing markets. Additionally this balance puts the Company in a stronger position to generate attractively overall performance in 2007 and beyond. With that I will turn the call over to Joshua to begin the Q&A session.

Holy. Could you please assemble the Q&A roster? Question And Answer

[Operator Instructions]. Your first question comes from the line Jon Groberg, Merrill Lynch.

Hey guys. Congratulations, on a good quarter.

Thank you.

Thank you.

First question just from a clarification standpoint, since you did only include 11 weeks in Serologicals last year. Do you know roughly what that was? Was it $2 million to $3 million, or what they contributed this --?

The first two weeks of the third quarter of this year was roughly $7.5 million. So that's the reconciling number.

Okay. Thanks. And then can you talk a little bit more about margins. I know you had mentioned before that you are going to invest more in trying to drive the growth, which you know; if you excluded that $7.5 million you still kind of have double-digit growth there in the bioscience business. But you also delivered much better margins than kind of what we are expecting. What were the primary levers of that? Was it just the gross margin flow through? But it looks like you also were able to get more leverage as well?

Well some of this is gross margin as you correctly said other. But the major driver certainly SG&A leverage, and you see the synergies coming in from our acquisitions and the fact that we are selling the same end market and the fact that we have successfully completed the integration work is showing now in Q3.

Hey, Jon, I would just add. There is a slight benefit from a strong bioscience quarter versus bioprocess, and then within bioscience there is a benefit from a very strong performance in the drug discovery business.

Okay. And just sticking with bioscience for a second again, I know you, there is some of the Sero business have some offices there in Southern California. Were any of them impacted by the fires?

No, they impacted, yes, but not operationally, not materially. There were some people who couldn't get to work, but it was... we were operational during the whole time, so yes, it was closed, but we were okay.

Okay, that's good news. And then moving to bioprocess for a second. I mean, obviously, you had a very strong first half, you said slowing in the second half. And you expect it to be. Is that the reason for kind of maintaining the more conservative guidance, even though you had a very strong third quarter? Is it primarily because of the uncertainty there still on bioprocess as what's going to happen here in the fourth quarter?

Yes, I mean we foreshadowed this trend in at the Analyst Day, and it's very difficult to really pinpoint it down with a great degree of accuracy. And that's why we have given that direction for the remainder of the second half, but I would say that it's fairly isolated. It's a few accounts, they are making adjustments. It doesn't actually mean that overall the biotech business is not a major engine in the pharmaceutical industry. So, we think it's fairly isolated, but it's really hard to exactly forecast it, okay, when is this adjustment over.

And just follow-up on bioprocess. I mean, you guys have been strong in that business for so long consistently. And then if you look at some peers, just this last quarter, it's somewhat difficult to isolate exactly, specifically, as you guys in bioprocess. But they have put up pretty good numbers even in this quarter. Is it just that you are stronger. Your bigger presence in some of these big companies that are having a larger slowdown do you think, or is there any risk that there is a share shift. You mentioned that you think you could gain share, but is there any risk that share shift could go in the other direction?

Well, first of all you have to look at downstream processing companies, which are the classical filtration companies, but that's still with the majority. If you look at the two companies that have reported, we clearly have better performance. Clearly. Secondly, we have the highest market share. The highest market share in large biotech. We have the highest market and those customers are making adjustment, you will see a disproportionately larger impact. But we also have launched a number of very important new products in bioprocessing. We would have updated our entire product line, all the key steps and downstream processing by Q1, Q2 of '08 and these products they are now in customer trials and they come out very strong, so that's why I'm quite confident that our position over time will actually be strong out of this.

Okay and then last question, I'll get back in the queue is there, Charlie, is any reasons to think you know historically going into the fourth quarter, you tend to have a lot better... sequentially better margins given the strength in the fourth quarter. Any reason to think that should be different this year?

Sequentially, we should see improvement in the fourth quarter.

Okay. Great. Thanks, congratulations.

Thanks.

Your next question comes from the line of Tycho Peterson, JP Morgan.

Hi, good afternoon.

Good afternoon.

Hi, Tycho.

Maybe just following up on one or two of those questions on the bioprocess. It sounds like there is some moment of caution here but I would assume you are still pretty excited about the disposable opportunity. Can you comment a little bit about how you see demand from the disposables right now? Where we are in the product cycle? I guess you have got the mix 200 but I think there is some pending launches going into the backend of the year, and then also Thermo made an announcement about entering the disposable manufacturing markets. So, how you see maybe, a competitive landscape changing over the next year or so?

Yes, the disposable market is very attractive, and when we talk of disposable, we talk about containers, filters and connectors. We see a very strong... we had very strong demand, it's not... it's covered in the numbers but it has exceeded our expectations at this point. We are the only company who has the capability to put all the different components together, and so we are starting to see traction. It is competitive; you have several players in there. You mentioned Thermo Fisher. They have been in this market for a long time, through the Hyclone division. But there are also a number of other companies who have gone into it. Fundamental value proposition is very good for customers because you can make the operations simpler and there's a chance to reduce the cost substantially, so we are very committed to that, we are continuing to expand that product line as quickly as we can and come up with new products. So, we'll be talking about this more over the next year.

And is your visibility, I guess, improving on the bioprocess side, as you shift more towards the disposables or you getting kind of specked in earlier through kind of trial runs?

We see on the pipeline side, yes we have good visibility. I would say yes, absolutely.

Okay. You had mentioned, there is stem cell business in your prepared comments. Can you just give us a sense as to how large that is today and maybe geographically is it predominantly in the US or you seeing overseas demand as well?

We don't break it down to that level of detail, it's in our bioscience division in the life-science business unit, and in that business unit it's a components of it. It's one of the fastest going areas, it's mainly in the US but other markets are also starting to catch up, so, but today it's mainly US-based.

Okay. And then finally, maybe one for, Charlie. In terms of the sales force, is there been any underlying change in terms of how you are kind of comping the reps, are they, is it essentially on revenue or there is a large kind of margin component there in terms how they are getting comped?

There haven't been any material changes to how the sales force is comped in the year. And each business is a little bit different taking into account both revenue dynamic and in some cases profitability dynamic and in yet other cases some non-financial activities that we want to comp people for doing as well, in terms of educating the market. So, it's a... it varies a little bit by business and there have been no material changes during the year.

Okay. Thank you very much.

Your next question comes from the line of Derik DeBruin, UBS.

Hi, good afternoon.

Hi, Derek.

Good afternoon, Derik.

So, I have got a few questions, and my apologize because I kind of dropped off midway, hit the wrong button, so just refresh me so your for the first nine months of the year, your organic revenue growth was 9%?

Right.

Okay, great. And 8% organic, in 3Q that's about... that's excluding a couple of weeks from here. Right?

That's... it includes the couple of weeks.

Includes the couple of weeks. Okay.

Yes.

Okay. And you have maintained a 7% to 8 % number overall for this year?

Correct.

Okay. And I guess, and going now, basically looking at the same line of bioprocess, when you are talking about a slowdown in 2008. Does that mean... you guided to 7% to 9 % this year. Are you be looking at potentially somewhere in the mid single-digit range next year or do you have any comments on that?

Yes, no it's what we do at this time of the year, is we really doing a very detailed planning business by business. And so at this point I'm not comfortable making projections for 2008 exactly. What we will do is, we will do very detailed planning with our customers, customer by customer particularly with those large biotech customers and then in... when our Q4 earnings call is due which will be in end of January, early February we will give detailed guidance for 2008, because we will have just much better visibility. As I have said earlier, it's really hard to call it by the quarter.

Okay.

But there is impact into '08.

I guess, just from what you have heard so far, are you expecting, are you hearing rumors of more massive restructuring and potential changes for biotech customers.

No, it's a mixed bag. As I said it's isolated to a few customers and we see also the opposite, we see major expansion plans, we heard Novartis announce the $700 million investment into Singapore. And as you know we are global and we have the capabilities to follow our customers globally. We are seeing very good growth in Europe, a double-digit growth driven by meds but also the vaccines, very healthy business in parts of Asia. So the good news is biotech is going global, and we're global company. The short term adjustment is in US biotech which has today the biggest share of the global biotech market, so that's really what it is today.

Okay. When... and I guess looking at your inventories, and I know that sometimes you have relationship where you hold inventory for customers if they take it. Is that going to... has there been changes again on biotech right now. Is that going to hamper your ability to hold your inventory number with them when it happen so quickly?

I think in the short term it does, but we're not... not necessarily for the reason you stated. We're not necessarily holding lots of inventory for our customers but when you have a sudden downturn in demand like this it does take a little while to reset the supply chain off on our end to adapt to that, so while inventory reduction is going to be a focus, it's going to have to be a measured approach at a pace that our plans can handle over a number of quarters.

Okay. And finally one other question. I guess it goes under the cash flow, do you see accelerating cash flow, free cash flow growth in two thousand and --

Two thousand and --

'08. Do you see... you had a good improvement this year. Do you expect to see it continue into right into the yearend and into next year?

Yes, we will continue, that remains the priority driving cash flow like we said that will continue to be a priority in 2008, so continues --

Year-over-year. Right?

yes, year-over-year, right, that's what I meant, year-over-year growth.

And debt reduction is still a key use of cash?

Yes correct.

Thanks very much. I'll get back in the queue.

[Operator Instructions]. Your next question comes from the line of Ross Muken, Deutsche Bank.

Hi, good afternoon.

Good afternoon.

When we look at the bioprocess business. I mean, you spend some time talking about some of the changes we have seen at big biotech, especially here in the US, and you noted that a predominance of the biotech market is US-focused. In terms of your costumer mix, is there any sort of specific numbers? Can you give me a relative sense to sort of how big biotech versus small biotech shakes out in terms of magnitude of mix, and even more specifically how sort of the very large high-end customers, who have been more specifically having the issues sort of breakout in terms of magnitude?

Yes, when you look at the large biotech customers, none of the customers is over 10% of our sales. But when you take two or three together they do have a major impact. And today the majority of the biotech market is consist of large biotech, clearly, by far. I can't tell you exactly the number, I don't have it right here, but it's by far, large biotech is the majority of the marketplace and that's worldwide. There is, however, a growing number of the next size biotech that has, is very promising, because people are bringing new molecules to market and they tend to partner them with large biotech, so in way they are also related to large biotech.

Yes, I guess, what I am trying to understand is so you said that the downturn in the really large customers in that business was probably more drastic and severe than you assumed, but there is no change to guidance. So I am, trying to understand how within the growth rate you sort of made up for this sort of unexpected weakness in terms of going forward to the remainder of the year.

Yes Ross to clarify, we were maintaining the total company guidance at seven to eight. The bioprocess downturn that Martin talked about has been a little more sudden though we certainly saw some of that coming in the second half, it's been a little greater than we thought. That means that bioprocess will most likely roll up a little below the divisional guidance we have given during the year.

Okay.

Bioscience though is doing pretty well and in the total company we are going to hang on to... hang on to the guidance range.

I see, so one is coming down and then the other is coming up a bit?

Yes, within the range.

Yes in total.

Okay. All right. That makes sense. And just one other clarification then; I was a little confused by this. In terms of the two additional weeks on Serologicals. Is that normalized in the growth rates or is that inclusive of the two weeks? So, the [Multiple Speakers].

... is that assuming that two-weeks additional last year were included? Or is it just sort of straight off of whatever the numbers were?

It's straight off taking this year's Q3 against last year's Q3?

And so you assume that additional two weeks is organic?

Yes, exactly. And we did in the guidance as well.

Okay, I just wanted to clarify that. All right. Thank you very much.

Your next question comes from the line of Jon Wood, Banc of America Securities.

Hi thanks this Brandon Cohlierd [ph] in for Jon. The receivable came down quite a bit in the period. Should we anticipate a similar magnitude of improvements in the coming periods? And do you have a long-term expectation for that metric?

Charlie, do you want to take that one.

Yes Q4 is our... sequentially our highest revenue quarter, so that obliviously drive the receivables balance up. And so that will be a use of cash in the fourth quarter. In terms of days though, we are looking to continue a gradual trend of improvement. I think we do quite well on receivables given our global mix though there is room for continued improvement. So, you should think in terms of slight improvement in days going forward, but sequentially Q4 is higher in dollars.

Right. Thanks. And can you provide the inventory balance that your cash flow guidance implies for the year or speak to that, those efforts?

No I can't.

Okay, thanks.

Your next question comes from the line of Seth Teich, Apex Capital.

Hi, I was wondering if you breakout the $7.5 million into bio-science and bioprocess to help us figure out what the core organic growth rates are?

Sure, give me one second. It's just over $2 million in bio-p, and just over $5 million in bioscience.

Okay. Thank you and then can you tell us what your tax rate guidance is going forward the rest of the year.

For the full year, we should run roughly where we are year-to- date. The non-GAAP tax rate is around 24%. Just over 24%.

Okay. And then on your stock-based compensation that seems to be tracking significantly less, I guess, in your initial guidance. Can you talk about that as to what your assumption is for stock-based comp this year, please?

We were $4.4 million in the quarter. I think, we are running about $12 million year-to-date and should end up around $16 million for the full year.

Okay. So the Q3 levels. Great. Thank you very much.

All right.

[Operator Instructions]. Your next question comes from the line Carl Brown, CRM.

Hi. I had a question for you Charlie on the foreign exchange. I understand you would be naturally hedged with a lot of cost in Europe and on the manufacturing side, on the SG&A side both in Europe and Asia. But I was just curious for the amount that you are not naturally hedged, can you just remind me, do you go out at the beginning of the year and hedge what that net exposure would be?

We do hedge a portion of the projected net exposure.

Okay. So, I imagine, somewhere on your income statement than you are booking some foreign exchange losses to offset the benefit on the top-line?

Right.

Can you tell us how much is that year-to-date and how much do you think it will be for the full year?

I don't have that number at my finger tips.

Can you tell where that will be booked to, I figured they'd be in other income line on the income statement, but I don't see one. Is it booked to the individual line items or how does that work?

It's buried in SG&A.

Buried in SG&A. Okay. And I was also wondering can you remind us the timing of the benefits from the manufacturing consolidation, the cost savings, and also the synergies from Serologicals. How much of these, what the ultimate benefits we were targeting, and how much we have already achieved to-date?

On the supply chain, we've had been talking in terms of annual benefits of $40 million or so, and one, the last estimate we gave of one time cost I believe was in the $45 million to $50 million range.

Yes, that's one-time... I am sorry that's one time cost to achieve the $40 million of savings?

Correct, one time cost of $45 million to $50 million to achieve the run rate savings of $40 million.

Okay. Are we achieving the run rate $40 million now or we still... is that still in process?

We are still some in process, there's a little bit left from factory consolidation. We have got another plant closure scheduled for early 2008 and then that would result in some fixed cost coming out, and so that's the piece of the benefit, and there are benefits yet to be gained from Lean Six Sigma and sourcing effort that should flow the additional benefits that should flow in '08.

Okay. And then on Serologicals?

On the Serologicals synergies this year, I believe the number was 12 to 14 --

12 to 15, sorry. And we are clearly seeing that if you look at the leverage in the SG&A number.

Okay. And do we have a target for '08 or is this 12 to 15 the ultimate number?

So annualized for '08 we said 15 to 17 in '08. So it's 12 to 15 annualize it.

And we haven't changed that.

Okay. Thanks a lot.

Okay.

Your next question comes from the line of Blake Goodner, Bridger Capital.

Hey guys, congrats. Martin I just, after last quarter everyone was sort of soaked down on the bioscience division, and with that came some negativity towards the Serologicals field. I mean can we just talk a little bit more about the 15% organic growth there. Just what exactly happened I guess in the third quarter, I know you were working a lot restructuring the sales force, there were lot of distractions, is it just simply that you kind of moved through that or did you see some significant market share gains from certain competitors. I just wanted you to talk a little bit more about that and then also just the sustainability of it. I mean obviously not at 15% but just, do you think you are through now and the vision that you set out for Sero is sort of coming to fruition? Thanks.

Yes, first of all we talked about the distraction an integration creates, and that has definitely impacted our Q1 and Q2 performance in bioscience, and because we are through this now and we can operate as one company that means in some cases, not only the systems but also people are in place, they work on driving sales, they work on driving new product that's what you saw in Q3 and that's overall. I would say the biggest difference between a Q1 and Q2 and now the Q3 performance. And then specifically, when you look at the specific businesses, we had a very strong drug discovery performance and that's one area where we pull together a lot of different pieces and we are seeing that business... it's very, very promising... many new areas. We saw a very strong lab order performance, particularly international, and that was good, that was not the case in Q1, so that helped certainly. We saw our classical bio-tools business doing better sequentially. We saw the research reagents business doing better. Those two businesses are not at full potential yet, that's where most of the work is still going on, combining products. So, in sum you have basically a business that has done well in many areas on many dimensions, but I would say still it's not at full speed. And one quarter is good but we have to see several quarters. And to your question, is it sustainable? 15% is very strong. I think these businesses have the potential to be in double-digit and we will continue to get to that. Will we get there every quarter? I don't know yet but when we reach guidance for '08, I will be very specific about what we'll do in bioscience in '08.

Okay. And then, and also I know one of the drags also in bioscience really here had been distractions and not having certain positions filled, I mean you got all the positions filled at this point?

Yeah, filled inside.

Okay. And then the last thing, the gross margin was really strong, I thought given that I know Fx weighs that down. Does this still keep you on that trajectory towards that 58% goal in '09?

Well, what's hard to discern right now is how much of that goes impacted by a currency exchange but if you take currency out of the equation which was the basis of our prediction. We are definitely on the trajectory.

And Blake we are. As we go through our... part of our normal planning process right now for '08. we're looking at that. The benefits from product mix and benefits from supply chain improvement are clearly showing. Against that we've got currency, we've got FAS 123 that wasn't around when we gave the guidance and we've got a richer mix of services now in our revenues which have an attractive contribution margin but a lower gross margin. So, you've got a couple of variables going one way, a couple of going the other. As we put the '08 planning together, we are really going to go reconcile that. And certainly we'll have more of commentary on that when we give the guidance in early '08.

Great. Well it looks like you made a lot of good progress in there, and good stuff on the free cash flow, and I was harrowing you about that, so congrats on that too. Thanks.

At this time, there are no further questions. I'd now like to turn the conference call back over to Martin Madaus for closing remarks.

Thank you everyone. Thank you for joining us tonight. The third quarter was another very strong quarter of financial performance for Millipore. As a company, as I said, we have a better portfolio, stronger and so we can manage short-term slowdowns like what we saw in bioprocess this quarter much better. We are delivering on our long-term commitment to investors earlier than we expected. We are excited about our ability to continue to generate value in the future. We have significant amount of work ahead of us to capitalize on our full potential. I'd like to encourage you to spend time, our substantially improved Investor Relations website, which has actually new information that we think is very helpful to you to evaluate Millipore. And I will also say, encourage you to visit our corporate offices here next quarter or so to see the management team and find out why we believe Millipore is such a great long term investment. So, thank you and good night.

Thank you. This does conclude today's Millipore third quarter earnings release conference call. You may not disconnect.