Scully Royalty Ltd. (SRL) Q4 2007 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Q4 and Fiscal Year 2007 Earnings Release Conference Call. 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]. Thank you. I would now like to turn the conference over to Mr. Joshua Young, Director of Investor Relations. Mr. Young, please go ahead.

Thank you very much Julianne. Good evening. I would like to welcome everyone to Millipore's fourth quarter and full year 2007 earnings conference call. My name is Joshua Young, Director of Investor Relations for Millipore. Joining me as speakers on today's call are Martin Madaus, Chairman, President and CEO and Charlie Wagner, 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 Millipore.com homepage or by accessing Millipore's Investor Relations website. 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 statement 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 involve 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 filings. Also note that the following information is related to current business conditions in our outlook as of today, January 31, 2008. Consistent with our prior practice, we do not intend to update our projection based on new information, future events or other reasons prior to the release of our first quarter 2008 financial results. Now I would like to turn the call over to Martin Madaus.

Thanks Joshua. I will begin by covering the key highlights for our fourth quarter and the full year of 2007. Fourth quarter revenues were $405 million, up 6% from Q4 2006 with all of the increase coming from currency changes. Our fourth quarter performance was adversely effected by lower spending from a handful of our U.S. biotech. We forecasted this trend early in the year and it affected our results for the first time last quarter. The slowdown continues to be isolated among a small number of U.S. account, but it became more pronounced in the fourth quarter. Outside of this handful of accounts, we continue to generate double-digit growth in Asia. During the quarter, we recorded a number of competitive wins for new molecules entering the pipeline and we converted several steps that were previously using our competitive products. This is a good sign for our future, but in the short-term there is not much we can do to offset the decline in spending from our largest accounts. These issues don't change our view that the long-term trends in the biotech industry remain very attractive and we are confident about our ability to benefit from these trends. So, I will talk more about the Bioprocess division later in the call. Now, moving on to our financial performance for 2007, Millipore overall generated solid financial performance. Revenues in 07 grew 22% to $1.53 billion with growth of 6% excluding the impact of acquisitions and changes in currency. We expanded our non-GAAP operating margin by 160 basis points into our non-GAAP earnings per share by 16%. This is good performance. As I've stated in previous calls with more balance between our two divisions, we now have the ability to meet our earnings targets even when we experience a larger than expected decline in our revenues. Our ability to manage our bottom line performance is much better today than it has been in the past reflects that our strategy to broaden our product portfolio through acquisitions, partnerships, internal R&D is paying off. In 2007, we stayed really focused on advancing our strategic growth initiatives and continue to strengthen our capabilities in the company. In Bioscience, we made significant progress in executing our strategy in cell biology, protein research and drug discovery markets. And in Bioprocess we expanded our presence in the disposal of manufacturing market and moved closer to been able to offer our customers a completely integrated solution for biotech manufacturing. We also, we branded the company, launched a brand new website, a new e-business platform and we successfully completed integration of Serologicals. Part of the integration as part of that we have delivered the $15 million in cost synergies we projected at the beginning of the year. The acquisition of Serologicals is to transform Millipore and today we are fast driving our company as we were prior to the acquisition. One of our key strategic initiatives that has been to improve our effectiveness to innovate, as you know new and innovative products help drive our business. And 07 we had an exceptional year for new product launches. Our Bioprocess division has strengthened their core product portfolio and we have increased the number of new product introduction from 8 products in 06 to 15 products in 2007. So couple of examples, these launches include new chromatography media that has the highest capacity, the highest flow rate of any comparable product in the market and a new disposal of mix that combines two technologies from two of the acquired companies. Our Bioscience division also had a great deal of new product launches. The launch of our new Lab Water product the Milli-Q Advantage one of the most successful product launches Millipore ever had. We are also getting good market response from our GPCR salines [ph] and multi flexing kits which we always offer as part of the drug discovery phase. Additionally, we formed a number of new alliances in both divisions and had key milestones in existing partnerships, such as the recent commercial release of the first Millipore product from our partnership with Gen-Probe. By developing new capabilities through acquisitions, forming a new alliances and accelerating our launch of innovative products, we clearly are strengthening competitive position both our Bioscience and Bioprocess divisions. In addition to our revenue and profitability growth, we had a strong year of cash flow performance. Our free cash flow more than tripled to $121 million 2007, [inaudible] an increase of $84 million from 2006 and we use this cash flow to strengthen our balance sheet and pay down our debt. Improving our cash flow was a key priority in 07 and I am very pleased with these results. Driving higher cash flow, we'll continue to do one of our top priorities in '08. So here are the key takeaways. Millipore delivered good overall financial performance in 2007. We met the earnings and cash flow guidance we provided early in the year, and we continue to significantly expand our profit margins. With the capabilities we have built we are far stronger company. We have made significant progress in bringing innovative products to the market. And now we have a business portfolio that's much more balanced across a broad cross section of attractive life science markets and customers. And as an executive team, this allows us to manage the business much more effectively when we see a downturn running our businesses. Next, I would like to talk more about the detail of the fourth quarter and the year. So I'll start with the Bioscience division. Excluding acquisitions not in a comparable period and changes in foreign currency rates, Bioscience generated 6% growth in the quarter, and 8% growth in 2007. Bioscience performance in Q4 was good, not great, and I'll talk more in detail about some of these here where we can still do better. On a full year basis, we are pleased with the Bioscience division organic revenue growth of 8%, which we believe represents above the market growth. This performance is a good accomplishment, especially in a year where we completed the complex and large integration of Serologicals and excluding currency in acquisitions not in the base periods the division growth approximately 10% in the second half of the year which was in line with the second half acceleration we predicted early in the year. Now Bioscience is benefiting from rapid growth in Asian markets that will be simply the case [ph] and China, India which overall are becoming a bigger percentage of the divisions' revenues. Demand in Asia has been well balanced across our product portfolio, reflects to start [ph] really substantial amount of research and development activity that's occurring in that region. Now from a product line perspective, our lab water business had a strong quarter and generated third straight year of really good performance. Our lab water is one of the premium franchises in the life science industry and has still plenty of opportunity for further growth. There are two main reasons for the strong growth in lab water; one is, we continue to have successful product launches, and number two is we are expanding into new markets for example the clinical markets where we saw a good results to our partnership with Dade Behring as we expanded in the clinical diagnostic laboratory. Although it's a smaller part of the division our drug discovery business unit which contains many of the products and services we acquired from Serologicals had a good Q4 and really exceptional year 2007. Drug discovery has some of the fastest growing products in the Millipore product portfolio. Moving on to life science business unit, that unit was formed in 07 by combining Biotools business which came from classic Millipore and the research reagent business which was acquired. And we saw good progress with solid results in segment such as stem cell but overall we are not where we need to be and our improvement effort showed positive results in the second half of 07. There is still more to do. Our science team is now focused on driving new initiatives to accelerate revenue growth from this segment. For example, we are in the middle of major expansion of our website, which was launched last year and we are driving to improve our e-business capabilities. And you have to match in this as not just another website, think of it more as a completely new sales channel for this business. New product introductions also remain critical in this business and therefore we are increasing our new product launches and we are creating high value kits that will improve scientific workflow and enable us to drive new revenue streams. And finally, we continue to focus on improving our sales force effectiveness this includes targeted sales and marketing promotions, continued investment sales training, customer seminars to educated the market value we can bring to their research activities and these are just examples of actions that will drive demand for our products and solidify our position as a leader in these new segments such as protein research and cell biology. So to summarize the performance of Bioscience division in 07. That was an important year for the division, it set the foundation to drive growth in the future, we completed the integration of Serologicals we rolled out a new sales organization, launched a new website and new e-business platform. We significantly expanded the portfolio of products that we can sell into our customer base and implementing changes of magnitudes and growing the business 8% is something I feel good about. Now turning to our Bioprocess division, excluding currency and acquisitions not in the comparable period, the division grew... the division's revenue declined 4% in Q4 and grew 5% for the full year of 2007. Now we forecasted this slowdown at the beginning of the year but the magnitude and the suddenness of the reduced spending has been more pronounced than we expected. The challenge we are facing from this lower level of spending are likely continue at least for the first half of 2008. Our analysis of customer accounts and the market shows that this downturn will be short-term in nature and the challenges we are facing in the U.S. are isolated to customer specific issues. We are not indicative of a fundamental change in the biotech market. As a result, we believe that our Bioprocess division will rebound in the second half of the year, so our customers achieve their planned inventory levels and return to a more normalized pattern of spending. If we exclude the impact of the large U.S. accounts where volume declined, the rest of our U.S. biotech business continues to grow in double-digit. This speaks to the fact that many of these companies are seeing good underlying growth outside of the U.S. Our Bioprocess business in Europe and Asia has been strong and is also generating double-digit growth. And finally, for the ample of U.S. biotech customers as I mentioned earlier we believe that they will continue to see good underlying growth for many of their products. As a result, we expect they achieved their targeted inventory levels and return to a normalized spending pattern in the second half of '08. It's also important to remind investors about the composition of our Bioprocess portfolio which is not related to biotech production. You can see on the slide that we are showing right now at roughly 50% of the division is related to biotech and the other half division is categorized as classic pharmaceuticals which we show on the right hand of the slide. Now, classic pharmaceuticals mainly consist of products for traditional vaccines, antibiotics from pharmaceuticals. We also still have a small amount of business related to food and beverage in these segments. Key takeaways that while biotech drives, the up and downs, in Bioprocess, the division remains diversified across hundreds of customers and product lines. The biotech business which we show on the left hand of the slide represents about 50%, the division has an estimated annual market growth rate in the double-digits and we estimate that we have more exposure to the biotech sector than our next closest peer in the industry. So, that's why we see the effects of any pull back in the biotech business much more significantly than our peers. The majority of our revenues are derived from 35 key customer accounts, so there is a much higher concentration in our biotech business. As a result we tend to see variability in our quarterly growth rates, so weaker [ph] Bioprocess performance we experienced in Q3 and Q4 is solely related to our largest accounts in the biotech segment of our business. Rest of our Bioprocess business performed as planned or better in 2007. So, now on the specific dynamics impacting Millipore's biotech business let me tell you why we remain confident in the attractive fundamentals of the industry and our ability to drive growth as a leader in this segment. We categorize the biotech market as monoclonal antibodies, bioengineered vaccines and other recombinant protein drugs. The overall biotech market is expected to grow from $93 billion, 07 to $166 billion in 2012. This represents a healthy growth rate compound of 12%. A good market to be in as a major supplier. So, if we break down the biotech growth further, the primary driver for the market over the next five years will come from the growth of 10 monoclonal antibodies that are commercially known today. On this slide, I show that these monoclonal antibodies and the growth they are expected to generate between '07 and 2012. Many of these drugs are expected to get approval for new indication, which will further expand the sales volume. Although there are some drugs on this list that will go much faster than others on the whole, this said our pharmaceuticals is expected to grow 14% compound growth, which is very strong. Millipore is well positioned to benefit from the growth of these drugs over the next five years. Another positive market trend is a significant amount of investment into biotech by both private equity investors and by large pharmaceutical company. In March, pharma has invested $76 billion in current biotech companies since 2005. As traditional, pharmaceutical company shift more of their pipeline. On chemically based drugs to treatment to life and biotechnology higher number of these biological drugs will come into the market, which again will benefit our growth. This trend is contributing to the large number of monoclonal antibodies that are entering the clinical pipeline. In 2007, the number of monoclonal antibodies beginning Phase I study was up 34% over '06. Additionally, if we look at drugs that are closer to being approved, there was a 31% increase in the number of monoclonal antibodies in Phase III studies. I believe these trends are good signs we have in this market. Moving on, there are also 10 new biological drugs that could be approved by the regulatory agencies in '08, and I have included them on the list in next slide. There is obviously no guarantees of these drugs will be improved, I do believe the chances are pretty high after we had only one approval last year. We don't expect that these approvals have an immediate meaningful impact on our performance in '08 but over the next five years they have the potential to push our growth higher. Today's analyst forecast, these 10 new drugs could represent as much as $7 billion in sales by 2012 again a great potential for Millipore products. And finally, last key data points I wanted to show you here is that they are 30 new biologic facilities that are scheduled to come on line by 2011. As these facilities come online and start to manufacture biologic drug they will also drive higher volumes of biologic drugs that will require our products and services. Additionally, and not included on the list are the major investments taken place by companies who are seeking to manufacture generic version of biologic that again before the market core products therefore by increasing manufacturing ones. So based on what I have presented so far, it's obvious that there is a very compelling long-term picture for the biotech market. But the underlying growth of biologics that are on the market today, the incremental contribution of new biologics that could enter the market in the next 2 years. Demand for our products should be very strong for the next five years. However, biotech is not a market that lends itself to the short-term and predicting the timing of these molecules impact on our growth rates can be difficult especially if you try to do it in a 12 to 18 months timeframe. But I can tell you inequitably is that I believe that our large U.S. biotech customers were rebound that the biotech market is fundamentally healthy and that Millipore will benefit in the underlying trends that I just shared with you. So, before I turn over the call to Charlie I wanted to leave you with a few closing thoughts. When I became CEO of Millipore three years ago, I laid out a clear strategic plan for the company. This plan included very specific financial goals as well as strategic priorities for the company. From a financial perspective, I talked about increasing the company's scale and accelerating our revenue growth and since that time we have increased our revenues from $883 million in 2004 to $1.53 billion today and generated a three-year compound revenue growth rate of 20%. I spoke about improving profitability of the company increasing our operating profit margin by 400 basis points by 2009. We have delivered on this objective two years early. Excluding FAS 123R expense we have increased our non-GAAP operating margin by 450 basis points since 2004. I spoke about building new capabilities becoming more innovative as a company. We have acquired four companies on multiple partnerships and significantly improved the value R&D portfolio. In short we are on-track to accomplish exactly what we [inaudible] in 05. The track record we have established as a management team and the exciting long-term trends in the industry. I am confident that the short-term challenges we are seeing from a handful of U.S. biotech customers will pass and we will be well positioned to generate attractive performance in the future. Now I'll turn the call over to Charlie.

Thanks Martin. I will now provide some additional details on Q4 and full year 2007 financial performance. I'll begin with a discussion of our GAAP performance in the quarter. Revenues grew 6% over last year with all of this increase resulting from changes and foreign exchange rates. Our GAAP operating margin increased to 16.9% of sales, up from 9.6% in Q4 2006, and our earnings per share were $0.81, a $0.47 increase over Q4 2006. The increase in GAAP operating margins and EPS reflects underlying improvements in gross margins and other operating leverage, but is primarily the result of a reduction in pre-tax cost related to our supply chain initiatives, the integration of Serologicals and other one-time costs. In total, these pre-tax costs were $18 million in Q4 2007, compared to $43 million in Q4 2006. On the next slide, we show our Q4 2007 non-GAAP operating results and I'll encourage you to review the non-GAAP reconciliation table in the press release for the detail of our adjustments. Martin already provided a divisional view of our revenue dynamics, so I'll add some color from a geographic perspective. Including the effects of foreign currency translation revenues in the Americas declined 12% in the fourth quarter due to the softness we experienced in key Bioprocess accounts. Europe grew 6% and Asia Pacific revenues grew 22% in Q4 2007. The strength in Asia was balanced as we are seeing a significant amount of research activity and investments into new biologics facilities especially in areas like Singapore. We are also happy with our performance in Japan which delivered strong performance in 2007. Our 2007 Q4 non-GAAP gross margin of 54.8%, increased year-over-year by 30 basis points. Non-GAAP SG&A expenses represented 26.9% of sales compared to 27.5% in Q4 2006, an improvement of 60 basis points. R&D spending represented approximately 6.7% of sales, an increase of approximately 50 basis points over Q4 2006. Our non-GAAP operating margin of 21.3% increased 50 basis points over last year's fourth quarter. The increase was driven by a higher gross margins and increased SG&A leverage. Our non-GAAP tax rate in Q4 was approximately 22.4% and EPS was $0.98, an increase of 13% over Q4 2006. On the next slide I show our GAAP results for the full year 2007. We grew revenues by 22% which includes a 5% positive benefit from currency translation and 11% increase from acquisitions. Excluding acquisitions and currency the company grew at 6% in 2007 which included 8% growth in our Bioscience division and 5% growth in our Bioprocess division. We significantly approved our GAAP profitability in 2007. The higher profitability was driven by higher gross margins and operating leverage and the reversal of tax reserves in Q1 and Q3. On the next slide, I show our 2007 non-GAAP results. Non-GAAP gross margin increased by 50 basis points for the year primarily due to the positive impact of our supply chain initiatives on the performance of our largest manufacturing plants. For the year non-GAAP SG&A represented 27.9% of sales which was down a 130 basis points compared to the same... compared to last year. This result reflects the achievement of $15 million in integration cost synergies and other productivity improvements. Our lower SG&A spending as a percentage of sales was modestly offset by higher R&D spending for the year non-GAAP R&D spending represented 7% of sales compared to 6.8% in 2006. The net result was that non-GAAP operating margins increased 160 basis points during 2007 from 18.7% of sales to 20.3% of sales. Cash flow from operations during the fourth quarter were $78 million which represented a $10 million increase over the fourth quarter last year. Depreciation and amortization was $31.4 million in Q4. For the year we generated cash flow from operations of $222 million, a $75 million increase over 2006 and within the range of guidance we have provided earlier in the year. Factoring in CapEx spending of $101 million during 2007, we generated approximately $121 million of free cash flow. We have paid down approximately $200 million of debt with this cash flow. So in total the primary driver of our strong cash flow performance was a higher level of profitability we have established in the business, managed CapEx spending and the reduction of integration related costs. At the end of the fourth quarter, net accounts receivable were approximately $292 million representing 67 days outstanding, flat from last year's fourth quarter and down five days sequentially. Inventory at the end of the fourth quarter was approximately $277 million representing 138 days of supply, up 20 days from last year's fourth quarter, but down 11 days from last quarter. On a year-over-year basis, higher inventory days of supply were partially attributable to the lower volume of Bioprocess sales in the second half of the year and partially attributable to targeted inventory bills as part of our supply chain initiatives. So to summarize, 2007 was a year of solid financial performance, 6% organic revenue growth, 160 basis point improvement in our non-GAAP operating margin, 16% growth in non-GAAP earnings per share and 226% growth in free cash flow. While we face some challenges along the way we are certainly very pleased overall with this level of performance. Before turning to guidance, I want to spend a few minutes reviewing the progress we have made as part of our global supply chain initiatives. As you can see on the slide, 2004 non-GAAP gross margins were 53.3% and in 2005 we set a target to significantly increase our non-GAAP gross margins by 2009. Since that time we have closed five facilities, implemented lean six sigma programs and launched a global procurement program to drive savings that would enable us to achieve that goal. These initiatives and a more profitable product mix have driven over 300 basis points of improvement in gross margins. So, on the whole, we have executed the supply chain programs well and delivered much of the savings we targeted. However, during the same period we also saw two factors offset some of these gains. First, the dollar has weakened significantly against the Euro, because we have significant manufacturing operations in Ireland & France, the stronger Euro translates in the higher recorded manufacturing cost for us. Although, the stronger Euro has slowed our reported gross margin which had a positive impact overall on reported revenue growth and our bottom line. In addition to the currency changes, our gross margin improvement target did not reflect FAS 123 costs since the accounting rule did not exist when the target was set. The negative effect of currency in FAS 123 costs are lowering our reported gross margins by more than 100 basis points relative to the target performance. So, when you factor in approximately 300 basis points of improvement offset by over 100 basis points of currency impact and FAS 123 that explains most of the 190 basis point net improvement from 2004 to 2007. Excluding currency impacts, we expect that our supply chain initiatives will deliver further improvement and that we are on-track to achieve our program objectives. However, given the impact the currency fluctuations have on our reported gross margins, we believe that net operating margins are the most appropriate way to measure the past and future profitability improvements of the company. Now, let me turn to our 2008 guidance. We expect the company to generate total revenue growth of approximately 6% to 7% in 2008, with approximately 2 percentage points of that growth coming from changes in foreign currency. We expect the Bioscience growth will be above the company's overall growth rate and Bioprocess growth will be lower than the company's overall growth rate. We expect to generate non-GAAP earnings per share of approximately $3.58 to $3.63 per share. Since we anticipate, that our large biotech accounts will continue to represent a headwind through the first half of 2008. We expect that our revenue and earnings growth will be more pronounced in the second half of the year. A factor affecting the comparability of our 2008 non-GAAP earnings per share will be the year-over-year increase of our FAS 123 expense. On a pre-tax basis, we expect this expense to grow from $16 million or approximately $0.20 of EPS in 2007 to $23 million to $24 million or $0.28 to $0.29 of EPS in 2008. There are two reasons... two primary reasons for the increase. First, in advance of adopting FAS 123, the company may change to its equity base compensation plans that has the effect of lowering our stock-based compensation expense in 2005, 2006 and 2007. The year-over-year increase in 2008 is primarily related to those changes. Second, we have significantly increased our number of employees and expanded our management team over the past two years; this has expanded the number of employees receiving equity compensation. In 2008, we see an increase towards the more normalized level of expense. Moving to our cash flow forecast, we expect that 2008 will be another strong year of cash flow and it will generate a $150 million of free cash flow. We define free cash flow as cash flow from operations plus capital expenditures. Finally, before I turn the call back over to Joshua, I want to spend a moment talking about our mid-term outlook for the business. Beyond 2008, our three-year outlook is for total company revenues to grow in the mid to high single-digit annually and for earnings to grow in the double-digits during that time. We believe this information is helpful for long term investment decisions and we will continue to provide periodic updates on this future. With that, let me turn the call over to, Joshua, to begin the Q&A session.

Thank you. Julianne, if you could please assemble the Q&A roster. Question And Answer

Thank you. [Operator Instructions]. Your first question is from the line of Dan Leonard with First Analysis.

Hi, good afternoon.

Good afternoon.

Hi, Dan.

I just got a couple of questions on the Bioprocess business. Martin, the lack of visibility on that business is that really a function of the uncertain demand for your customer's products or is that a function of some kind of guarded information flow between yourselves and your customers?

Its really a function of how the biotech industry works, we are dependent in this production business on production runs and as factories are being changed put out of commission or on commission that has a huge impact on the demand for our products. We have actually fairly good visibility overall for the production run and what that means to our product but what's hard to predict is for our customers to really accurately project when they have changes in their demand which then in turn drives changes in the production schedule. So it's really the nature of how biotech works today.

Okay, it sounds to me like you answered the question that it's really the uncertain demand your customers have for their products is that accurate?

Yes, that's mostly accurate also changing inventory levels they have had a policy of generating lot of finished good inventory if the customer changes that policy that means lower less reduction and so they reach the new inventory levels and then normal production resumes.

Okay. And do you have any visibility on what's allowed them to I guess enact that business model change if you will on inventory days on hand, has there been some technology shipped on their front or what's the long end to reduce their safety side of your products?

That's very company specific and that's an individual company policy decision and has to do with how they assess the risk in their supply chain and look at their partners and it's a question of also what kind of financial priorities they have. So there is more focus on managing cash flow and obviously they will reduce inventories.

Okay. Thank you.

Your next question is from the line of Tycho Peterson with J.P. Morgan.

Hi, thanks for taking the call. Maybe just following up in the last final questioning, from your perspective is there any way to change the structure of some of the contracts, and in the background I guess here, I know Serologicals prior to the acquisition had moved towards some take or pay contracts, and I am just wondering what your mix is in? Or there is any flexibility in terms of how you negotiate?

There is some and we are striving to do that, however, the influence on the fluctuations will be very limited, and I am not familiar with the take and pay contract that you are referring to, I really don't know what that is.

Okay. In terms of kind of the global market here you talked about Japan actually holding up, okay, can you talk more generally around what you saw at year-end, you referred to some mix commentary about the budget question not seeing much expectations? And what mainly you are seeing more from the academic market I guess in the pharma market?

On the market side we saw slight improvement of the market conditions overall and our specific performance has improved as we put I would say, when we made some management changes and we put more emphasis in our Bioscience business and put some new business strategies in place and that has showed some good results.

Okay, and in terms of the disposable business, maybe you don't want to quantify, but can you give us a sense as to how that's doing in the market competitively if you are seeing anything interesting out there? And how we can think about the ramp up of the business in particular some of new mix over the next 18 months or so?

Yes, the disposal business although small relatively small today will be larger and larger growth catalyst for us. And when we talk about disposal business, we talk about the bags that are required, we talk about the connectors, we talk about the disposable filtration devices and their services and we are the only company who can provide this completely in one hand with a comprehensive solution. But we have just in '07 really in a second half starting to see some very good traction as one of our fastest growing businesses and we are expanding right now, our production capability. So the acquisition of Newport was very good for us and 2 years after the acquisition we were already expanding capacity, so that's a good sign I would say.

Okay. That's it for me, thank you.

Your next question is from the line of Jon Groberg with Merrill Lynch.

Good evening, how are you guys.

Hi Jon, good evening.

Good evening.

First question... probably you are getting a lot of questions on Bioprocess here, but first of all as I am talking with some of your customers and if the consensus through the sense I got was that most of you guys did not hold inventory for more than 6 months. And you are kind of at a point where your 6 months into this process is saying that you are really working down your inventory. I am just curious in your conversations as you talk to your sales people and after talking with some of your big customers. Can you guys dive a little deeper into what's going on there as they work down their inventory levels and why you think it's going to take maybe another 6 months here?

Yes, so let me first clarify, we are talking about inventory at two different levels. The most important one is finished drug substance so that's the product that the customers are making and holding a supply. And that can vary that could be a year, could be 2 years sometimes, because again we're talking about life saving drugs here and you could never be on back order with these drugs. So, that's the most important part of the inventory policy. But there have been shifts there, our products considered raw materials in the production process and the policies can vary a lot, it could be 90 days, it could be six months very customer specific. But the bigger driver is how much finished drug substance is being produced, because that determines the production schedule and that determines how much of our product is used. That's why I am looking at each drug, how is that drug performing and how does that translate into a production schedule.

And just a follow-up on that a little, I mean, is your outlook given what you said before about the difficulty and maybe predicting some of it is your outlook, and are truly conservative in that sense do you think it takes kind of maybe a year to work through this where you had specific conversations with, but again it sounds like, as you are saying it's a handful like three big customers here that are causing the headaches in the U.S. did you have any conversations with them about what they are kind of expecting?

Yes, we had very specific discussions and we talk to these customers all the time, they are very close and so we take that into account and provide our best estimate as we always do. And that's based on that information that we have today and I think so far we have been at least the last three years relatively awkward in predicting it. Remember in July of 07 after the second quarter, we were up 12%, 13% and we have predicted a downturn. At that time lot of people question me whether this could really happen and it did happen. What is hard to predict is to what degree something goes down or something goes up, but we clearly saw it coming and we talked about it in the Q2 earnings call.

And then just another question in Bioprocess here if I can, you mentioned all the number of plans that were going to come online, and I'm just wondering, you know, if there is ever chance for someone to either gain or lose market shares typically when a new drug or a new plan... you talked about new drugs coming on line as well. So I'm just wondering what makes you confident as you can at least... you can have a gain or just maintain some of your share as new drugs and plans come on line?

A number of things, and I'm absolutely confident that we will gain market share based on three things. First of all, over the last year we have updated our entire downstream processing offering, so we have a lots of new products and these products are better. So when you have an opportunity for a new molecule and you have a side-by-side comparison, we have a very high percentage to win because the products are better. Number two is, we go beyond products and we provide very comprehensive application services and we can do it around the world, why is that relevant, a customer takes a process and lets say wants to expand in Singapore or they would like to use know-how from a supplier to implement exactly the same process in that region. We have the people and they know-how to do that, that's another competitive advantage. And also we have expanded into new product lines and when we talk about solutions we can provide bags, filters, assembly, services from one vendor that's another I would say competitive advantage and that's why I really think we are very well positioned in these new molecules and also in the existing ones.

And last question just on the guidance, Charlie or Martin, so you are basically understood you had a 4% to 5% organic growth and roughly 7% if you take kind of a midpoint in terms of EPS growth for '08, which you did 6% organic revenue growth in 07 and delivered 16% EPS growth and I know some of that you had some synergies with the Serologicals. Interestingly down over last few years I mean if there is no other leverage in the business model or why so conservative on the EPS growth.

Charlie, do you want to take that?

Sure. Yes, Jon, clearly our earnings growth rate over the past few years has been very strong and in 2008 we are certainly effected by the Bioprocess division in the first half of the year. I think it's important to recognize that we are thinking about the business with a long-term perspective and not necessarily looking to maximize earnings in any given period. So it means that though we are seeing some short-term challenges we are not necessarily cutting investments or programs that contribute to the future growth of the company. Obviously, another factor affecting the bottom line performance in 2008 is the step up in FAS 123 expense that I described that step up knocks as much as 200 basis points off the EPS growth rate in 2008.

[Operator Instructions]. Your next question is from the line of Jon Wood with Bank of America Securities.

Okay thanks. Charlie where would you like to get the debt level before evaluating other capital deployment options?

Well as you know two-thirds of the debt is fixed with long maturity and the remainder... remaining third or less than a third is on the revolver. We are looking at in 2008, free cash flow primary use being debt reductions as well, though we continue to look at other ways to deploy the cash. Notably, we continue to look at acquisition opportunities and certainly we would consider bolt-ons that advance our strategy, but the primary use in 2008 will be for additional debt service.

Okay, so no potential for stock repurchases?

Not our intention right now.

Okay, can you give us a view on the tax rate and the capital expenditures in '08?

Yes, on tax rate, as we have said in the past we're typically expecting to be in the range of 25% to 27%. 2007 is a bit of an anomaly in that regard and so that continues to be what we expect. CapEx, we're moving towards focus on free cash flow, operating cash flow less CapEx and we have given free cash flow guidance at 150 for next year.

Okay, but any just... you release qualitatively, I mean, I was under the impression that the CapEx levels in '07 were maybe a bit above a maintenance level directionally, is it going to grow significantly on the capital expenditures?

No CapEx should be at or below '07 levels.

Okay, and one quick one, if there is, I mean, theoretically if there is an expected label expansion on a drug out there, will a biotech customer always wait until an FDA decision before ramping orders or do they... have they historically ramped in order before a decision is made?

It depends, they have in some cases build capacity anticipation of an approval. That's what they would typically do. It's a major expansion that they would do. It depends on how large it is.

Okay. Thanks a lot.

Your next question is from the line of Derik DeBruin with UBS.

Good afternoon.

Good afternoon.

Hi Derik.

Can you just give us some qualitative yield in terms of how the volume of the Bioprocess business impact the gross margin numbers. When we currently look at the numbers that came in this quarter is that comparable gross margin that we should look at or could it potentially have a bigger impact in the first half of the year?

Well qualitatively I would say if you look at the magnitude of the impact in overall division obviously we have seen some impact on gross margins too. We are luckily in a position today to respond to it much better than in the past so our large manufacturing plants have done an excellent job of covering that. Couldn't cover it completely, but at normal... steady state volumes it would have been better. I think it's a good observation if you make.

So I guess when you start looking at the Bioscience division I mean, 2008 can we kind of think of that as a normalized year of growth in that business or maybe if you can essentially see some... as you get more product and as you get many products out there. Can we see that ticking up towards the higher end of the range or above the current level that you are guiding?

That's certainly I'll hope that and our plan to get there as I said earlier, when we... if you grow 8% organically in the market consistently and you have some new products it's certainly what we are shooting for, for 2008, and if the markets hold up in life science research like they have in '07, I think we're very much positioned with the new products and particularly with discovery and cell biology, if we execute well we are definitely positioned for strong growth in Bioscience.

Okay. I guess as the pharma... if you give big drug discovery portfolio when you are working at Bioscience division and as the pharma company is kind of been a little choppy out of the gate 2008 given the problems that they are seeing. I guess, are you guiding conservatively in your Bioscience expectations between the potential drug discovery could be a bit choppy?

No, it's more, I think drug discovery will benefit or continue to benefit from the outsourcing trend in pharmaceutical companies and as we broaden our products and services that continues. Second, is the move into Asia and that's why we're bullish on Asia. We have done a little bit in '07, but we will do much more in '08 in Asia. So, we think pharma as a customer who will continue to be a strong growth driver for us even though there are some issues.

Okay.

But it depends on where you playing and this is a good outsourcing trend right now, and we think that will continue over the next few years.

Okay. And just one final question, I guess, when you said you had some new product and competitive wins in the Bioprocess business, so this is... I guess, we're in the process in terms of I wouldn't expect to see existing products that are already existing here in the pipeline?

Both. In some cases, if the product doesn't touch the protein you can exchange and we had... at least I know of a couple. And then with the combination of bags and filters we are just more competitive in the disposable business, you have more opportunity for wins. But you are right, usually it's in the new pipeline of products, but existing drugs are also possible.

Or a new plant as well.

Yes, or a new plant or process change... you go from one version of a drug to a new version of drug.

Yes.

That's when you have an opportunity to convert.

Yes, I guess when you look at capacity of Bioprocess globally, how much new capacity do you estimate will come online in Asia?

In Asia. Well, there are four major plants being built right now and they are coming online starting end of '08 and then '09, 2010. I have seen them, they are quite large, they are just like in the U.S. large scale operations. I cannot speak so much for India, but it is definitely growing biotech industry. And then there are some plans. In Japan, less dynamic and Korea.

Your next question is from the line of John Sullivan with Leerink Swann. John Sullivan - Leerink Swann & Company: Hi guys. Good evening. A couple of quick questions. Charlie, can you just repeat toward the end of your comments you made a comment regarding the long term outlook or at least a long term whether investor should think of your company?

Sure. Beyond 2008, the mid term outlook is for top line growth in the mid to high single-digits and earnings growth in the double-digits annually. John Sullivan - Leerink Swann & Company: Okay. And so that would imply... that would be a period when this is bullish FAS 123 expense pass the company and when we are at a more normal growth regarding bio products, is that true?

Yes mostly with regards to the underling business the FAS 123 steps up one more time in 2009 and then normalizes beyond that. John Sullivan - Leerink Swann & Company: And with that mid-term outlook how would you contrast a mid-term outlook to what happened in 2007 where you had 16% EPS growth on 6% organic local currency revenue growth?

I think that its hard to compare individual years with averages the point here is that we are confident with the mid term outlook, we are trying to give folks a sense that 2008 is clearly a year where we have got a deal with a challenge in the first half but overall we are confident in the outlook and on average we are going to deliver the midterm outlook that I described. John Sullivan - Leerink Swann & Company: Okay and then specifically can you just give a sense of what has to happen in R&D spending over the intermediate term in order to meet your goals does R&D spending have to grow at the rate of sales or how should we think about R&D spending over longer period of time?

John I mean we think about R&D as an investment in future growth and will put as much investment into it as think there is opportunity to drive the business so we are not necessarily managing to represent a sales on that. John Sullivan - Leerink Swann & Company: Okay and then my last question can you just give us some sense are there specific cost control initiatives that come out of this year office for 2008 that can have a positive impact on operating margin and are there any initiatives in particular that can be particularly positive in that regard?

Well I mean the entire company is committed to hitting our targeted performance and clearly we have got good prudent expense control in place for 2008, and then I am also spending a little bit of time focusing on the working capital aspects of the business as well. So, consistent with our desire to deliver top line growth, profitability improvement and cash flow improvement I will be spending my time on those items. John Sullivan - Leerink Swann & Company: Thanks very much.

Your next question is from the line of Ross Muken with Deutsche Bank.

Hi, guys this is actually Mike here for Ross. Most of the question I had already asked. I just wanted to touch a little bit on the Gen-Probe collaboration? I know those when you mentioned they are particularly strong, so can you talk a little bit more about where you see that going, what the potential opportunity would be there in terms of being nice add into growth?

Over the next few years we will launch a number of products that are used in microbial detection of contamination in the biotech manufacturing process using amplified probes and our sample prep devices. It will take us probably two to three years to get a complete portfolio of products out. Our market is about roughly 120 million tests. We think on a per test basis you can achieve at least $10 from what we know today. We get a good share of this it should be a meaningful contribution to the company's revenues. It's potential, it's new technology that has to be invented. This is not necessarily something that exists today, it's truly innovative. But with the first product release we feel we are meeting our milestones and making good progress. So it's meaningful but it's mid-term I would say, it's not something that happens right away in '08.

[Operator Instructions]. Your next question is from the line of Peter Lawson with Thomas Weisel.

I wonder if you can talk through the drivers of the growth in Asia?

Yes, I am glad to. Asia has obviously two very large economies today, and that would be China and India and for us a very significant mature market, Japan. So, I'll talk about Japan first. Japan is a good market, where we have relatively high market share and where we have turned back into I would say reasonable both and where we have very good opportunities with the acquired businesses and that's what we are focusing on. So for us Japan mainly a Bioscience business some biotech business but the biotech industry is more limited. In India, it's the opposite almost. You have strong pharmaceutical industry and a growing biotech industry. So the potential in India for our Bioprocess division is very good, and it was one of our fastest markets last year, that's also good for Bioscience across the product portfolio. And in China we are benefiting from the general investment trend in to laboratories for clinical research, for general research for environmental labs. So we see a good pick up our Lab Science business, our Lab Water Business and starting also in our classical Bioprocess business. These are the three big ones for our numbers, and then there are some other markets that also relevant but those three are the main drivers. Does that answer your question?

It does, and you have all the part and place to capitalize on that growth?

You never do, there is so much opportunity today, we've added a lot of people, we added a lot of distribution capacity to cover the country. We have started to produce in Bangalore and I have established a regional structure with dedicated management. We have done a lot. It's never enough, but how much can you do in a couple of years... continue to focus on that so.

And the Bioprocess business, was there any pockets of strength and whether any changes versus 3Q?

Strength was regionally again in Asia and Europe from the product lines standpoint, both the manufacturing capsules pickup with new products, and our NovAseptic product landed well too, so that's in a nutshell the differences.

Okay, and you are saying you are seeing competitive wins in that bio production side?

Yes, we do.

Okay, thank you for taking my questions.

Sure.

Your next question is from the line of Paul Lee with Brown Advisory.

Hi, Martin.

Hello.

I have the question regarding the balance time organic growth in the quarter, came down to 6% versus last quarter 15%, what should I look in the future... what would be there normalized organic growth rate we can expect because its looks like Q3 may had benefited from some initial uptick of the water business?

Yes, we said earlier when you look at the total market of Bioscience which is a very large market and you see the growth rate varies between 5%, 6% sometimes 7%, if you go above that rate that would be a good performance in our view on average and that's what we have done last year and that's what we're shooting for. Will we achieve it every year? Can we be better in one year? It's possible, but if you look at the total market and we always target to be above the market growth.

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

I am sorry it's getting late; there is a couple of follow-up. One for Charlie, it wasn't too long ago you guys were looking at your business sort of a high single-digit, low double-digit business. So for your medium term outlook I mean Martin what that link to walk through a number of positive trends in the biotech business. You are hoping to improve your Bioscience business. Why would you market the company as a mid-single digit to high single-digit growth or medium term with all that?

The outlook for the business, Dan, is quite strong and now that we are about twice the size that we were a few years ago that is our outlook for the business mid to high single-digits. We think that, that represents a very attractive growth rate talking into account all the products and all the markets that we are in, and with that we expect that we continue to generate considerable operating leverage. So that is the outlook and we feel good about that.

Okay. And just curious with all the uncertainty, inherence and forecasting, why is your EPS forecast for 2008, why is that range so tight versus prior years?

We think that's the range that we are going to be in for 2008.

But are there certain processes you have which gives you better visibility on cost, or revenues is there anything behind that tightening that you could give some color on or is it just some...?

No, I think we have done, we have a good handle on the year, we clearly are able to manage the bottom line pretty well I think is evidence by the performance in 2007 with the larger portfolio of businesses and a good handle on the operations. We were able to deliver the bottom line we commit to so we are confident with a narrower range for 2008.

Ladies and gentlemen we have reached the end of the allotted time for questions and answers. I will now turn the conference back over to Mr. Martin Madaus for any closing remark.

Thank you for joining us tonight. Again we generated solid financial performance for 2007 and as you saw we are on-track to meet our long-term strategic objectives. I look forward to seeing many of you at the Merrill Lynch and Lehman Brother conferences this quarter and we encourage you to visit us at our corporate offices in Billerica, Massachusetts. Thank you and good night.

Thank you for participating in today's Q4 and fiscal year 2007 earnings release conference call. You may now disconnect.