Scully Royalty Ltd. (SRL) Q3 2008 Earnings Report, Transcript and Summary

Good afternoon. My name is Chastity and I will be your conference operator today. At this time I would like to welcome everyone to the Millipore Q3 2008 Earnings 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. Mr. Young you may begin your conference.

Thank you very much, Chastity. Good evening. I would like to welcome everyone to Millipore's third quarter 2008 earnings conference call. My name is Joshua Young and I am Director of Investor Relations for Millipore. And joining me on today's call are Martin Madaus, Chairman, President, and CEO; and Charles 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. This presentation can be viewed by clicking on the webcast link on the Millipore.com home page 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 forward-looking statements regarding future events or in the financial performance 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 might include but 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 and our outlook as of today October 30th, 2008. Consistent with our prior practice we do not intend to update our projections based on new information future events or other reasons prior to the release of our fourth quarter 2008 financial results in early February. Now I would like to turn the call over to Martin Madaus.

Thanks, Josh. Let me begin by summarizing kind of the key takeaways for our third quarter performance. First we saw slightly improved business dynamics in the third quarter which enabled us to generate better top line performance led by our bioprocess division which delivered a significant improvement over revenue declines it experienced in the previous three quarters. Although these top line results are far from satisfactory it is a marked improvement from our recent economy. Second we continue to deliver solid bottom line earnings growth. In the third quarter we grew our non-GAAP earnings per share by 13%. This shows we are doing an effective job streamlining operations and driving efficiency improvements throughout the organization. And third we're delivering on our promise to improve our cash flow performance, pay down our debt, generate free cash flow of $64 million, repay approximately $6 million of debt in the quarter. So, on a year-to-year basis we have already exceeded the amount of free cash flow we generated last year. We are very happy with this performance and expect that we will continue to generate attractive cash flow performance also in the future. Fourth we continue to forge new partnerships that put us in a strong position to grow in adjacent markets and expand our product offering and I'll talk about the advantages of these agreements offered to Millipore later in the call. Finally we announced the second phase of our global supply chain initiative in the quarter. The first phase if you remember of this program was announced in '05 and will be completed by the end of 2009. Second phase of the program will enable us to further reduce our manufacturing footprint and drive process improvements throughout our supply chain operations. In total we expect the second phase of the program to generate about $11 million to $15 million of annual savings when it's completed by the end of 2010. Next I would like to move into some of the details of the third quarter. First revenues so we reported total revenues of approximately $395 million excluding changes in foreign exchange rates the company generated revenue growth of 2% in the quarter. On a divisional level, divisional performance excluding changes in foreign exchange rates the bioprocess division revenues were unchanged versus Q3 of 2007. This is a sequential improvement and this came from a year-over-year comparison and a stronger performance in North America where we reported growth for the first time since the second quarter of 2007. This growth came primarily from the large U.S. biotech customers who returned to more normal purchasing patterns in the quarter. Clearly this is good news and it's a sign that the business is starting to stabilize in North America. We're seeing positive indications and as a result we no longer expect the significant declines in the region we have seen over the past year. Now offsetting the improvement we saw in North America was a modest decline of the division's performance in Europe as some of our customers delayed the expansion plans and reduced in the quarter. We have seen signs of some of the European companies becoming more conservative in response to a quite uncertain outlook for the sector but also the broader economy. Excluding the effects of foreign currency translation the bioprocess division has still grown 2% in Europe on a year-to-date basis. We believe that trends we are seeing in Europe right now are different and distinct from the dynamics that have affected North America over the past year. We have far more diverse customer base in Europe and also some of our non-biotech customers seeing a greater effect on their business from the global economic slowdown. So although the magnitude and the severity of the slowdown in Europe is far less than we've seen in North America the weaker performance in the region is adversely affecting the overall growth rate of the division. One of the most consistent of our bioprocess division has been process monitoring tools. If you remember these products are used to quickly and easily sample and identify potential contamination in a variety of manufacturing processes. Many of these products are used in quality laboratories so they have not been affected by the inventory reduction as seen in other segments of bioprocess. Additionally the business unit has benefited from having a much more diverse customer base than we have in other areas of bioprocess such as [inaudible] processing which has really a very high concentration of biotech customers. And a meaningful portion of this business segment comes from the food and beverage market. Another really bright spot of bioprocess continues to be the performance of our disposable manufacturing product which has really become now the fastest growing area of the whole division. Over time many of our customers are transitioning from the traditional older technology stainless steel to disposable technology because they offer much greater flexibility, lower cleaning costs, lower valuation costs than the old technologies provide. And as a result we've been actively phasing out certain stainless steel product lines since we believe our future growth will come from disposable technologies. By acquiring several disposable products and driving significant internal growth from our own products our disposable offerings have become a really material portion of the division's revenue. And that means for you as an investor that over time we have a higher growth business with better profitability profile than if we remain focused on just supplying stainless steel systems. So in summary our bioprocess performance, the overall environment remains tough but it's getting better. We expect Q4 to be another challenging quarter and that the division will report a modest year-over-year decline in revenues. We have the benefit of being specked into many FDA approved large manufacturing processes and regardless of any economic downturn patients are still going to need biologic drugs to treat diseases such as cancer and rheumatoid arthritis. Our business is not dependent on the approval of capital expenditure budgets and many of our customers continue to perform quite well. This provides us confidence in our long-term performance because we know that over a multi-year period our sales will grow as our customers continue to manufacture these drugs. Now let's turn to the bioscience division. Excluding changes in foreign currency the division's revenue grew 4% in Q3 and has grown 6% through the first nine months for the year. Recently we eliminated a small unprofitable product line that was no longer a part of the overall portfolio in this division. So if you adjust for this elimination the growth rate in bioscience would have been 5% in Q3, 7% for the first nine months 2008. So I consider our third quarter performance as solid particularly when you consider that bioscience generated 15% organic revenue growth in last year's third quarter and faced a very difficult year-over-year comparison. Same trend as in past several quarters, our lab water and drug discovery businesses continue to their primary growth drivers for the division. Lab water is really one of the most consistent performers in our portfolio and has been delivering anywhere between high single digits to low double-digit growth since 2004. Now 60% of our lab water business comes from consumables and services the other 40% is from our lab water instruments which typically sell for about $7,000 to $12,000 per unit. And our success in placing these instruments over the past few years has created significant follow up opportunity again for consumables and services. Much like the other successes of our business success of lab water comes from really innovation, effectively innovating our product line, launching new products that bring overall better value to the customer. That's been our recipe for success and we have been at this now for three straight years, new product introductions and we have many more new products in the portfolio coming from the lab water division. In drug discovery we continue the rapid growth in the third quarter with biopharmaceutical services and Milliplex Map is leading the pack. The launch of our new Milliplex kits during the quarter was very well received by our customers. The significance of Milliplex is that it has brought together technologies of two of the leading brands that, we acquired in the Serologicals acquisition and that is Upstate and Linko. And this greater product breadth enables us to offer customers a comprehensive light, easy to use kit that includes researcher's consistency, productivity when working with these assets. Milliplex is one of the great examples of product innovation that we have now been able to execute because we have expanded capabilities from the acquisition. Moving on to the life science business unit, life science business unit generated modest growth in the quarter. We continue to have successful new product launches and solid performance for our laboratory filtration products. Over the past year we have made significant investments in new products, invested into sales channels and also redesigned completely our website. Also focus on marketing initiatives that communicated our global capabilities, communicated our brand and our product offerings to the market and clearly we have made progress but there's still room for improvement to generate higher levels of growth in life science. One of the positive developments of the quarter for life science was the launch of the first commercial product from our partnership with Guava technologies to provide bench-top, small flow cytometry solutions to the cytometry markets. We are off to a great start with this partnership and earlier this month we launched a suite of new kits that will add important contents that researchers can use along with Guava. In addition to distributing the current Guava products we also are co-developing a new set of instruments and kits with Guava. Our strategy in both bioscience and bioprocess in both divisions has been to leverage partnerships to add R&D expertise. And we are doing this because otherwise it would be very difficult to build to get into these new fields internally and absolutely required to bring to the market a constant flow of new innovation. On this slide if you follow along on the slides, I show several of the co-development partnerships have initiated such as agreements with companies such as Siemens, Gen-Probe, Novozymes, Rohm and Haas, and several others and there will be others. Short-term these partnerships help to us to really share the risk and the spending on development projects and we expect that these partnerships will increase R&D spending in the future as these projects progress and we make milestone payments leading up to the commercial of the product. Forging these partnerships is an important part of our overall strategy that will help to fund future growth. Last quarter I mentioned several programs we're evaluating to help drive better earnings and cash flow in the future. In the middle of September we provided some more detail in an 8-K filing. We are now launching the second phase of our global supply chain initiative in which we plan to close additional manufacturing facilities, make other important improvements to our overall supply chain and infrastructure costs. We launched the first phase of this program in 2005. Over the past four years we have closed six manufacturing facilities, implemented new Six Sigma and formed our global procurement organization. First phase of this program is scheduled to be completed next year and will be successful in helping us to drive significant efficiency improvements to all of the supply chain. More than half of the savings we generated in phase one of the program were from products than simply eliminated fixed costs by closing down facility. And as we look to implement the second phase of this program we are focusing on further process improvements by continuing to improve our overall manufacturing footprint. We believe we'll incur costs between $25 million and $30 million between 2008 and end of 2010 and that will deliver savings of approximately $11 million to $15 million annually. By consolidating more of our manufacturing activities in our centers which we call centers of excellence we can drive better performance, improve quality of our products, and reduce overall total supply chain costs. I mentioned earlier that we are delivering strong levels of profitability in cash flow in 2008. Through the first nine months of this year we have expanded our non-GAAP operating margin despite generating flat revenue during this period. This high level of profitability and lower capital spending is helping us to deliver very strong free cash flow that we're using to pay down our debt. And as we move forward we're looking to improve our free cash flow even further by reducing our investment in working capital. This quarter we launched a new initiative to help us improve our working capital over the next few years with a specific focus on lowering our inventories. But it's premature to share specific targets at this time with you. We believe the combination of higher growth in the business, lower capital spending, and working capital improvement will enable us to deliver very attractive free cash flow over the next few years. Before turning it over to Charlie, I want to reiterate my key messages here that you should take away from the Q3 performance. First we really made significant improvements to our top line performance particularly in our bioprocess division. It's pretty much fair to see say that the division has rebounded but we expect the fourth quarter will continue to be somewhat challenging but I believe that we will… bioprocess division will enter [ph] overall return to better top line performance in 2009. Second we are doing an effective job maintaining the profitability of the company in what has been a difficult environment. Our year-to-date non-GAAP earnings per share growth and non-GAAP operating expense show how effectively we have adjusted our spending to a lower revenue base. And third we have significantly de-leveraged the company generating attractive free cash flow, continue to drive growth in our free cash flow through initiatives such as working capital improvement remains one of the company's highest priorities. Fourth we are continuing to fund projects that will help us to drive growth in the future. This is key. This includes investing in partnerships, fast-growing product lines, as well as improving our go to market strategies and sales channels. And finally we are taking steps to ensure that we are in a strong position to continue to expand our profitability in the future. This will allow us to streamline our supply chain and make us a more efficient and competitive organization. And with that I'll turn it over to Charlie.

Thank you, Martin. And I'll now provide some additional details on Q3 financial performance beginning with a discussion of our GAAP performance in the quarter. Revenues grew 6% over last year with 4% of that growth coming from changes in foreign exchange rates. Our GAAP operating margin decreased to 15.1% from 15.5% in Q3 2007 and earnings per share were $0.71, an 8% increase over Q3 2007. The increase in EPS reflects the impact of higher revenues and lower interest expense from paying down our debt over the last year. 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 increased 5% in the third quarter as a result of improved performance in the bioprocess division. This is a major improvement over the 11% decline reported through June 30th. Europe decreased 2% and Asia-Pacific grew 3% in Q3 2008. From a year-to-date perspective excluding the effects of foreign currency translation the Americas have declined 6% while Europe has grown 4% and Asia has grown 6%. The bioscience division has delivered high single digit revenue growth in both Europe and Asia throughout the first nine months of the year. Within Asia we've seen strong growth in China offset by some slowdown in India and our business in Japan continues to perform as expected. On the next slide we show our Q3 2008 non-GAAP operating results and I'd encourage you to review the non-GAAP reconciliation table in the press release for detail of our adjustments. Our Q3 non-GAAP gross margin of 55% decreased 90 basis points on a year-over-year basis due primarily to product mix and a stronger euro during the third quarter of this year. As a reminder we conduct a significant amount of our manufacturing in Ireland and France so a stronger euro increases our manufacturing cost and lowers our gross margin. Non-GAAP SG&A expenses represented 28.6% of sales compared to 28.2% in Q3 2007, an increase of 40 basis points, primarily due to higher FAS 123 expense and employee separation costs. Non-GAAP R&D spending represented approximately 6.4% of sales which is down 70 basis points from the third quarter of 2007 but the primary driver of this decline being lower project spending. As Martin mentioned earlier in the call we expect R&D spending to move higher as our top line performance improves and as we achieve more milestones in our R&D partnerships. Our non-GAAP operating margin of 20.1% decreased 50 basis points over last year's third quarter due primarily to lower gross margins. Our non-GAAP tax rate in Q3 was approximately 20% primarily due to the release of a $1.2 million tax reserve and true up of our annual tax rate. We expect that our full year non-GAAP tax rate will be on the low end of our previous guidance of 25% to 27%. Our non-GAAP EPS was $0.93, an increase of 13% over Q3 2007. On the next slide I show our GAAP results for the first nine months of the year. We've grown total revenues by 7% with all of the growth coming from changes in foreign currency translation. Our improved GAAP profitability was driven by lower one-time costs, of favorite product mix, lower interest expense, and controls over spending. On the next slide I show our nine-month non-GAAP results. Out non-GAAP margin decreased by 20 points due primarily to the third quarter impact I described earlier. With slightly lower operating expenses our non-GAAP operating margins increased 20 basis points to 20.1%. This operating margin improvement led to year-to-date earnings per share growth of 11%. I think this slide is important because it demonstrates how we've responded to the downturn in our bioprocess business. With no organic revenue growth to the first nine months of the year we've aligned our cost structure to our business volumes in order to deliver solid profitability in the business. I'm pleased with how quickly the organization has reacted and how well we've executed initiatives to streamline the organization. Cash flow from operations during the third quarter was approximately $86 million, depreciation and amortization in the quarter was $33 million, and factoring in CapEx spending of $22 million. During the third quarter we generated approximately $64 million of free cash flow. We paid down approximately $68 million of debt this quarter bringing total debt reduction to approximately $127 million through the first nine months of the year. Through the first nine months we've more than doubled the amount of free cash flow we generated in 2007. I'm pleased with our significant progress in improving our free cash flow as this has been one of our highest priorities. The improvement has come from generating higher profitability as a corporation as well as lowering our overall capital spending. As you can see on this slide we've been executing on our commitment to de-leverage the company and pay down debt and over the past two years we've reduced our debt to EBITDA ratio from 4.3 to 2.9 today. This not only improves the financial position of the company, it also provides us with important flexibility to deploy capital towards smaller acquisitions or other strategic acquisitions that could drive future growth. Our lower debt levels have also been a key driver of our earnings performance as we've significantly decreased our interest expense over the last year. Another important advantage of paying down our debt over the past two years is that we've significantly improved our liquidity position and overall we're comfortable with our ability to meet our financing needs for the foreseeable future. We ended Q3 with approximately $1.1 billion in debt and this debt carries an average interest rate of 4.65%. This debt consists of $183 million on a resolving credit facility, $565 million of convertible notes due in 2026, and $364 million of senior notes due in 2016. All of debt pay down has come on the revolving credit facility and we have the capacity to draw another $300 million on the credit facility as of the end of the quarter. Since some of our debt is denominated in euros, the recent weakening of the euro has reduced our interest expense and further increased our head room to borrow against the credit line should we need to. The committed credit facility is backed by a group of 16 strong U.S. and international banks with the primary bank on the facility being Banc of America. None of the 16 banks represent more than 10% of the credit facility. Moving on now to working capital. At the end of the third quarter net accounts receivable were $306 million representing 71 days sales outstanding up from 67 days at the end of 2007 and down one day from last year's third quarter. Inventory at the end of the third quarter was $282 million representing 138 days of supply which was flat with the end of 2007 and down 11 days from last year's third quarter. If we look at inventories on a dollar basis they're approximately flat on both a year-over-year basis and compared to the beginning of the year. This is a significant achievement given the sharp fall-off we've seen in the business and reflects the fact that we've been effective at aligning our manufacturing volumes with the lower revenue performance during the year. So to summarize the key takeaways from the third quarter, bioprocess is improving and helping to drive better top line performance. We're executing on our objective of driving free cash flow and paying down our debt and finally we're demonstrating the leverage of our operating model and ability to manage our business through a challenging period. This is evident in our operating margin expansion and the strong earnings growth through the first nine months of the year. Before turning to guidance I want to remind investors about how changes in foreign currency are having an impact on our reported results. Changes in foreign currency added four percentage points of growth to our top line revenues in Q3, a smaller percentage than we saw from currency translation in Q1 and Q2. However the impact of currency changes on our bottom line is much less significant as currency changes also drove an increase in our reported costs. The net result of changes in foreign currency exchange rates was a positive impact to our earnings per share in Q3 of $0.01 compared to the same quarter last year. A key advantage of our global footprint is that despite the volatility in the currency markets these fluctuations have a small impact on our bottom line profitability. Now turning to an update for 2008 guidance. Due to some of the changes in the currency markets we now expect total revenue growth of approximately 5% in 2008 this is down from our previous guidance of total revenue growth of 6% to 7% in 2008. We're maintaining our non-GAAP EPS guidance for the year of $3.50 to $3.58 per share. And we expect to generate approximately $170 million in free cash flow during 2008. This is up from our previous guidance of $150 million due primarily to a lower run rate on capital spending. As a reminder we define free cash flow as cash flow from operations less capital expenditures. With that let me turn the call over to Joshua to begin the Q&A session.

Chastity if you could assemble the Q&A roster at this time. Question and Answer

Certainly. [Operator Instructions]. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Derik De Bruin with UBS.

Hi, good morning or good afternoon.

Good morning. Where are you Derik?

It's been a long day. A couple of questions. So could you just give us a little bit more color on what you're seeing in '09 in terms of and of your customer ordering patterns… what do you think about the '09 environment in terms of your customer ordering patterns in bioprocess?

Yes. We have really a clear expectation that the bio process ordering pattern will more or less come to a normal pattern that we are through these… what we characterize as major inventory adjustments with the core accounts and that we'll… in 2009 we'll definitely be back to growth. But we are not in a position yet to give specific guidance. As you know we do that after the Q4 results but when you look at the trends it looks like things have worked themselves through the system. In North America in particular we're seeing the customers come back to growth, a little bit offset by a little bit of weakness in Europe. I mean that's more the general pessimism and the outlook of the economy but overall I think it would be a normal year in 2009.

Normal year being, back to mid-single digit organic growth as people build inventories?

Derik we're not going to give a lot more color than that until our next earnings call.

Okay. And I guess given that pharma has been undergoing some restructuring and maybe doing some changes recently have you seen any impact on your drug discovery business?

Not really. We continue to see outsourcing trends. We see good growth in our product business too which is used for drug discovery. So for example, multiplexing. No not yet. We're watching this very carefully. We've done a fairly thorough market assessment. But we continue to see good pockets of growth in the overall research market including pharma.

And I guess do you continue to pay down similar levels of debt at a continuous rate going forward?

Yes.

Yes. Derik at this point the reduction of the revolver continues to be the primary use of free cash flow.

Okay. And one final question. I guess once you squeeze the savings out of your supply chain initiative looks like you're on track to go… operating margin continuing to improve. Where do you think you can ultimately squeeze the operating margin up to? Does it approach 25% ultimately longer term in the business?

It's possible. I think every year we've found new areas for operation efficiency improvement we have a large integrated supply chain. We're just starting to do more outsourcing and I think over the foreseeable future several years we'll find more opportunities in that area.

Great. Thank you.

It's a very focused group.

Thank you. Your next question comes from the line of Tycho Peterson with JPMorgan.

Hi. This is actually Sun Ji [ph] sitting in for Tycho. Thanks for taking the questions. My first concern is for the bioscience segment would you be able to break out the growth from recently launched products?

No we don't break that out. And we launch hundreds of products. We watch that very carefully. But we don't, give out specifics, particularly, not quantitative for many reasons but we do highlight certain products so you can assume that the products we highlight have a significant impact such as the lab water products the Milliplex products and some of the products we highlighted in the last call.

Okay. And then could you comment on how large in the Guava opportunity might be? For example how many flow cytometry systems you have in the field and things like that?

No we don't break that out either.

Okay.

The only thing I would as add is we just launched a product in July and we're actively building a sales pipeline. That process really kicked off over the summer so we're excited about our start but it will be several quarters before we start to see a big impact from that.

Okay. And finally I didn't catch the tax rate guidance for the full year. Did you say it was 25% to 27%?

That would be at the bottom of that.

At the bottom? Is that including the R&D tax credit or…

Correct.

Okay. Great. Thank you very much.

Thank you. Your next question comes from the line of Jonathan Groberg with Merrill Lynch.

Good afternoon thanks for taking the call. Could you maybe just describe or clarify which product line you discontinued? I don't know if you said that up front I missed it.

It's a small business line that goes into what we it would call a flat market and its insignificant overall but significant enough for the revenue that we felt we needed to characterize that. But it's a non-strategic product line.

Okay. I just wondered if there was anything more.

No.

Strategic to the decision and there was something larger there. But it was just…

No. We do this on an ongoing basis and if it's in a way that it impacts the results we talk about it but we tend to phase out products that are either nonstrategic low margin on an ongoing basis. Remember we have 20,000 plus products. So if it impacts results we talk about it.

This was a line from Millipore not from Serologicals?

Yes from Millipore, yes.

And in the press release as well you mention the new 30,000 square foot membrane manufacturing line. Is that… are you shutting down any manufacturing elsewhere in the world that you're consult dating in this facility or is this just an expansion of this facility?

That is an expansion and its… remember, we closed down a larger facility in Cidra, Puerto Rico. So we are consolidating a big portion of a membrane manufacturing in Cork Island and to do that we expanded that facility. And the benefits are basically upgraded machinery quality systems and overall less overhead on an ongoing base.

Is there any pending change to taxes in Ireland that you're aware of?

No. No not right now Jonathan. The… I think we may have talked about that before but there's nothing right now on the horizon.

Then last question obviously from when the quarter ended to today there's been a lot of noise in the economy so I'm just curious kind of what you're seeing in the first three weeks of this quarter maybe more on… you talked about bioprocess and maybe more on the bioscience side on the lab water side. Have you sign any disruption at all given the last three or four weeks of what's been going on in the markets?

No not on the sales side. Obviously I think if this climate everyone is nervous. We're not seeing any changes in the end mark and the sales side obviously we have done our due diligence making sure we don't have any risk so we have done a lot of risk assessment various suppliers' banks and so we feel we're in good shape.

Okay. Thanks a million.

Thank you. [Operator Instructions]. We'll pause for just a moment to compile the Q&A roster. Your next question comes from the line of Ross Muken with Deutsche Bank.

So I was just hoping to dig a little bit more into what you're saying about Europe. What I wanted to confirm you said that it was down 2% and then on top of that I wanted just a bit of sort of clarification in terms of what percent of the bioprocess division that makes up. Because relative to your comments around Q4 a little bit surprised in terms of the general impact that part of the business could have just relevant because I didn't think it was relatively sizable.

The business in Europe is in terms of biotech is smaller compared to North America but we have other business segments more classical pharma. We also have some in there but a more diversion group. And as we've seen this dramatic shift in the economy in Europe I think we've seen a bit more conservatism from these customers across the board. And some projects have been delayed people haven't moved forward as they had anticipated. That's why you see the impact in Europe. Europe had really was going very well Q1 Q2 also the economy and all of a sudden in Q3 a big drop off. So we're seeing some of that impact.

Okay. It's in some of the more classical businesses. That's helpful. As you sort of look out to '09 a lot of the large cap U.S. biotech firms were pretty cautious on outlook for R&D and for their CapEx budgets. How are you thinking about that in the relative context to kind of the improved outlook that you're seeing? And then is that then more a function of just the fact that this year was so difficult on a comp basis things begin to improve or do you think kind of we go back to more of a normalized spending structure to what we've seen over the last few years?

In our view of the biotech portion of our business is that the fundamental need for these drugs hasn't changed. So the big antibodies vaccines they will continue to be produced and our adjustment which was basically an, overbuild of finished good inventory that has worked with the system. There is probably a little bit more caution overall so we will not go back to the double-digit growth that many of these customers have seen. But it's still when you compare it to classical pharma a very attractive market but we would see I would say attractive growth maybe a little bit less than what we've seen maybe three years ago but the demand for the drugs hasn't changed. If you look at some of the results from the larger biotechs it has been very good compared to maybe a few quarters ago we continue to see expansion projects in Asia moving forward. We hope to see the impact of some of the drugs that are close to approval there's at least one that will be approved next year. So you have got a number of things that indicate maybe not as go-go like a few years ago but very solid business in all of pharma, certainly the best segment to be in. And remember we are exposed on one hand with a production business which is the biggest part of our business but also on the research side and on the research side we see a lot of activity R&D dollars going into biotech development biotech R&D and we see that too. So hey that's why we're in biotech, biotech goes up and down but if you're in pharma you want to be in biotech. And that's where we are.

You mentioned the potential new product that will likely receive approval next year. Can you sort of characterize the last time you had a meaningful product introduction that sort of impacted results? And then two just… I know you can't give specifics but just on sort of a relative basis if you can give any qualitative comment to help us think about how much a new molecule like that could actually impact sales just in whatever way possible you could share?

Yes. For us the trouble with that is always it ranges so much so it depends so much on the success but on average a one antibody we've seen generating revenues of $10 million but it could are also $1 million if it doesn't go forward. But they are meaningful if they get approved. And what you should watch for is when do they get approved and do they see the steep ramp up because the steep ramp up and pick up of a drug means that a lot of inventory has to be produced and that's where the demand for our product comes from. So I would watch approval date and then ramp up.

That's really, actually very helpful, Martin. Thank you very much.

Thank you. Your next question is from the line of Isaac Ro with Leerink Swann. Isaac Ro - Leerink Swann & Company: Hi guys. Thanks for taking the questions. First off on just the bioprocess business I'm wondering how big of a contributor are small biotech companies with their sort of custom drug trial type candidates? How important is that to your business? And understand that the majority is in the big blockbusters but if the margin… could you see some impact if these companies had tighter capital budgets next year and put less drug into clinic?

Yes the small biotechs they are important for the future as they're inventing new drugs so they're important that they get funded. But in terms of our sales in a given year is very little. You want to make sure that you're dealing with these important customers because they're innovators in your products they use but in terms of value it's very small. It's more I think that these biotech companies who have promising molecules get funding and continue to survive because we want to see the pipeline of these drugs going up. But in terms of business volume next year no big impact. Isaac Ro - Leerink Swann & Company: Thank you. And then on the bioscience side some of your competitors have seen double-digit growth on an organic basis this quarter in their research kit franchises. How do you people about your market share in those markets? And then secondly getting back to that small biotech customer group how much do you rely on them for those types of kits?

Well first of all I'm not sure that the growth that was reported was all organic. I think there might be some acquisitions in there too. I've season that… particularly in the peer group the companies that have exposure to diagnostic markets they had any average higher with you rates. Other companies have very similar growth rates to ours in bio science. So I feel pretty guide about overall we're definitely not losing market share. It varies greatly when you do the comparison of where you play. And while we are certainly not 100% and perfect everyone we are definitely having some good impact in bio science and also remember our comparisons to the comparable period of '07 was a 15% growth now it's about 5%. So we you… it's not a bad number when you look at the comparison.

The only thing I would add to that is on a year-to-date base remember bioscience is 7% organic record growth just for the sale or the [ph] elimination of that product line so we think that's pretty competitive with the market. Isaac Ro - Leerink Swann & Company: Okay. And then just lastly on buy you process as you're guiding to it. I think you said a down year over year quarter in the fourth quarter. Beyond currency is there anything about there that you think is specifically hurting the business this quarter versus year-to-date?

It's just when you do the math and comparisons we just had a strong finish last year in Q4. And we just think the business will still be slightly down but the same trends that I indicated in Q3 will continue in Q4. There's to change really and then it will come back to growth in '09. Isaac Ro - Leerink Swann & Company: Okay. Thank you.

Thank you. Your next question comes from the line of Paul Li with Brown Advisory.

Hi. Just want to ask you mentioned about India. Remember last quarter you also mentioned about there's some weakness in India. Just want to see what's going on there and also about China. Have you seen any impact during the Olympics any temporarily shipment delays on things of that nature during that time?

Yes the dynamic is quite different as you indicated in those two countries. In India there's definitely a temporary kind of cool down in the pharma expansion so we see hardware sales for example driven by capital budgets are lower. Now India is not a huge part of our business but it's important it's an important future market so there's definitely a slow down I think driven by the general fairly rapid reduction in GDP growth outlook in India. We still believe it's a good market definitely a growing market next year when you look at the economic general outlook but slower. It used to grow in the 30%s and it's coming down a bit. That's basically it and it's basically pharma companies delaying expansion projects and slowing down. China is very different. We did not see an impact from the Olympics. We are not a large equipment manufacturer so we're not dependent on these swings. We saw a continued strong trend in China during Q3 very, very good growth and no indication that that should change right now.

Thank you.

Thank you. Your next question comes from the line of Eric Cristolli [ph] with Thomas Weisel Partners.

Good afternoon. Thank you for taking my question just filling in for Peter Lawson tonight.

Afternoon.

Just as far as your disposable product lines how easy is it for your customers the producers to kind of switch out those stainless steel containers and put in these disposable products? Do they have to take things off line or is it a quick and easy change?

It's not quick and easy. It depends very much on what they have. There are certain pieces of the overall process where you can replace one for example in the area of media filtration. You can do it easy. I've seen those. But it's always a change that requires some testing some evaluation a business case and then a switch. So it's always a multi-month sales cycle. It doesn't happen overnight. But the opportunity for us to do that in a more innovative more integrated way because we're the only manufacturer who really has all of the pieces. We have a broad range of filtration bags and a lot of application know-how. So we can actually go in and also convert business from competitors that, already use disposable technology and use the Millipore solution and that's what we're working on. So it's two things. One is converting steel to disposables and the other one is using disposables that are already are adopted and switching them to another product because it's a better solution that's more cost effective.

That's very helpful. Thank you. And as far as your water products division goes are you seeing any growth or any penetration outside the science research market? Is there any use in semiconductor industries or manufacturing industries?

Yes. The lab water business has the most diverse customer profile so it is used to labs that could be in mining in oil in all kinds of industries very broad. It's research, its clinical laboratories. We sell OEM equipment to clinical diagnostic manufacturers. We have some in cases collaborations. One of them is with Siemens and it's used in many different settings.

And in general those markets overall are all performing relatively well generally?

Yes. Yes, they do.

Okay. Great. As far as M&A targets or potential expansions is there one or two sectors that you can say if there is an opportunity be it lab water or some other area other certain places where you would focus on?

Well we focus on bolt-on acquisitions so smaller acquisitions that would fill a gap or where we see a great technological opportunity and when you look at the two divisions we see more on the bio science side simply by the fact that this is a larger market. It's more diverse technologically. But we see opportunities and more emphasis on bio science. We also look at in lab water we have a large market share and a very capable R&D organization so… and you have less of a need for M&A really.

Great. And then just one final question. I guess on the upcoming elections in the U.S. any concern about or maybe optimism regarding NIH funding or even academic spending maybe if endowments get cut would you potentially be affected on that? Any color on that issue?

I have no idea. There's a big difference between what candidates say and what they do. So I have no idea.

Thank you. [Operator Instructions]. Your next question comes from the line of Jon Wood with Banc of America Securities.

Hi, Charlie.

Hi, Jon.

Hi. You raised the free cash flow guidance. I apologize if this has been asked already but you raised the free cash flow guidance by $20 million. Is that all CapEx coming down?

It's mostly that, yes.

So CapEx around $80 million this year? Is that ballpark?

Yes, ballpark.

And then for next year any just… can you give us some qualitative comments around the direction of that… of capital spending next year?

Yes, Jon as you know, we have been working hard on improving our cash flow profile in general both through our working capital initiative and also being a bit for stringent with some of our capital decisions. We're able to take the number down this year partly by pushing a couple of projects out. Not canceling them but just pushing them out and then in other cases as I mentioned just being a little more stringent. So that's how we've achieved the decrease this year. If you look forward to next year we'll continue the same management approach and continue to be… keep the capital spending under control. So I wouldn't expect the next year's spending would be a lot different than this year's.

And I mean you've done a fairly good job of working capital even with the volumes kind of flat here. I mean is it safe to assume that if and when volumes pick back up is that when we see the real leverage in the working capital accounts?

For inventory, certainly, yes. Inventory it's a real opportunity when the business grows. It's much easier in that context to take inventory levels down.

We're not happy with our inventories right now. And if we had a normal demand they would be much lower but it's a difficult balance between driving this down and also keeping the factories going. So with normal volumes we would be in much better shape.

Understood. Thanks a lot.

Thank you. Next you have a follow-up question from the line of Jonathan Groberg with Merrill Lynch.

Thanks for taking the follow-up. Hi, Charlie I just meant to ask when I called before I think you have maximum living ratio of 3.5 to 1. When you negotiated with the bank do you have some minimum ratio that you have to get to by a certain time on your debt?

We had to get down to 3.5. Excuse me. We had to get down to 3.5 by… I think it was in the end of 2007 if I remember correctly. Beyond that there's, no restrictions whatsoever.

And Jon, just as a point of clarification. In the slide we showed debt to EBITDA in the context of just the financial statement. The bank's definition we are at 2.71 versus that covenant of 3.5 at the end of the quarter.

Okay. And then just a follow-up as well. Did you say did I hear you right I hadn't caught this and I apologize. Did you say bioprocess you expect to be down year-over-year from 4Q '07 to 4Q '08? Because I thought Q4 '07 was your weakest quarter last year and things are getting better.

Yes. We did say that in the fourth quarter of last year it was not the weakest quarter. The weakest quarter was in bioprocess, have been Q1 and Q2 actually of '08.

Yes. I know but on a year over year comparison I think you were down 4% organically in the fourth quarter of '07 and I think you were up 3% in the third quarter of '07. So I'm just thinking as a comp year-over-year. It's obviously easier and I think you grew a little bit this quarter so I just wanted to make sure I understood what you were saying.

Yes. That is correct and primarily the difference is Europe being weaker and North America still being somewhat challenging in Q4.

Thanks.

Thank you. We have reached our allotted time for questions. I will now turn the call over to Martin Madaus for closing.

All right. Thank you for joining us this evening. We can… I hope you could see today from our third quarter performance that we're making progress, improving our top line. But the overall environment remains challenging. We are executing on our commitment to drive strong earnings and cash flow. I believe this demonstrates to investors the attractiveness of our business model. And as our revenue performance improves as we increase the efficiency of working capital we believe we will be in a very strong position to generate attractive growth in our revenues, earnings and cash flow. So I hope to see you at the upcoming Credit Suisse/First Boston Healthcare conference in Phoenix, Arizona and at the Deutsche Bank investor forum in Boston. Thank you and good night.

Thank you for joining the Millipore Q3 2008 earnings call. You may now disconnect .