Thermo Fisher Scientific Inc. (TMO) Q1 2008 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific First Quarter 2008 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference may be recorded. I would now like to introduce our moderator for the call, Mr. Kenneth Apicerno, Vice President, Investor Relations. Mr. Apicerno, you may begin the call.

Good morning and thank you for joining us. On the call today we have Marijn Dekkers, our President and Chief Executive Officer; Marc Casper, Executive Vice President; and Pete Wilver, our Chief Financial Officer. Please be aware that this call is being webcast live and will be archived on our website, thermofisher.com, until May 23rd, 2008. To reach the replay of the call on our website, click on Investors, then Webcasts & Presentations. Please also be aware that a copy of the press release setting forth our first quarter 2008 earnings and future expectations is available on the Investors section of our website under the heading Quarterly Results. With that, I would like to begin by reading the Safe Harbor statement. Various remarks that we may make about the company's future expectations, plans, and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's Form 10-K for the year ended December 31, 2007 under the caption Risk Factors, which is on file with the Securities and Exchange Commission and available on the Investors section of our website under the heading SEC Filings. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change and therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. During this call, we’ll be referring to certain financial measures not prepared in accordance with generally accepted accounting practices or GAAP. A reconciliation of the non-GAAP financial measures used on this call to the most directly comparable GAAP measures is available in the press release setting forth our first quarter 2008 earnings and future expectations and in the tables accompanying such releases in the Investors section of our website, thermofisher.com under the heading Quarterly Results. Related information is also available in the Investors section of the website under the heading Webcasts & Presentations. With that, I would like to now turn the call over to Marijn.

Thank you, Ken, and good morning everyone. Thanks for joining us for our review of the first quarter of 2008. I'm very pleased to report that we are off to a good start for the year. We had strong financial performance in the quarter and a lot of exciting developments that will contribute to our growth going forward. So, let me give you an overview of our results, some comments on what we're seeing in our markets, and talk about a number of recent business highlights. First, the financial highlights. Since we completed our first full year at Thermo Fisher Scientific in 2007, our results can now be compared on an apples-to-apples basis, no more need for pro forma comparison. Our Q1 revenues grew 9% to a record $2.6 billion. Adjusted EPS rose 25%, adjusted operating income increased 19%, and we continued our trend of significant adjusted operating margin expansion with 140 basis points of improvement. So, we believe we delivered a strong quarter even though we lost between 1% and 2% of our revenue growth year-to-year because we had fewer days in the first quarter of 2008. We are very pleased with the way our financial business model is working. From our top line growth, we are able to pull through significant earnings growth and margin expansion. In addition, our focus on operating discipline and continued productivity, as well as synergies from acquisitions further strengthens our profit margins. An important part of our business model and I want to emphasize this, as I did last quarter, is that we run the company by striking a balance between our four key financial metrics; top line growth, operating margins, EPS, and free cash flow. We believe that this balanced approach is the best way to create shareholder value over the long term. So, moving on to the markets. Let me say a few words on what we are seeing at this point in the year. Our major life sciences and healthcare end markets remained strong and overall, we have not experienced any change from what we’ve seen over the past few quarters. The safety market, however, continues to be very weak, specifically the Domestic Preparedness segment, which led to poor results in that part of our catalog business. We also saw some softening of demand in certain industrial markets late in the quarter, specifically oil and gas and semiconductor, which are both relatively small markets for us. So, apart from some weakness in the smaller markets, in general, we haven't seen any significant change. I'm confident that our balanced mix of markets, global presence, products and services will limit our exposure to certain economic headwinds that we're hearing a lot about. This along with our proven operating discipline puts us in a strong position to deliver on our financial goals for 2008. So, a few words on new developments. Another advantage for us is that we have the resources to continue to build on our product portfolio and global presence to fortify our position as the world leader in serving science. We've had a number of exciting developments in the past few months that I want to spend a few minutes on. We had an excellent showing of new products at Pittcon and Analytica, and let me mention some of the highlights under our Thermo Scientific brand. One, we completely redesigned our Raman and FT-IR spectroscopy platforms to make these technologies available to the non-expert. These advanced techniques, which in the past were limited to specialists in lab, can now be used by just about any operator. For example, technicians in a busy forensic lab. Secondly in mass spectrometry, we launched new enhancements for our highly successful Orbitrap platform, adding MALDI and ETD capabilities for ever higher levels of sensitivity and mass accuracy. The Orbitrap with ETD allows scientists to significantly increase the number of proteins they can identify without increasing the experiment time. The Orbitrap with MALDI is especially suited to the imaging of whole tissue samples to precisely understand, for instance, how new drugs may affect the brain and other organs. We also introduced a new atomic absorption spectrometer called the iCE 3000 Series. This new AA system is designed specifically for highly regulated laboratory environments such as food safety, environmental, pharma, and metals and materials applications. I have to say that between both of these conferences we have the strongest new product lineup ever in our history, which demonstrates our ongoing commitment to technology innovation. Our product development and marketing teams did a superb job to pull this up, and I am confident this will pay dividends in the future. There is a lot of innovation going on in our life sciences, consumables businesses as well and we had two great examples in the past few months. First, we introduced a breakthrough in RNAi technology that greatly simplifies the method for gene silencing during drug discovery. Our new Accell platform makes it possible for researchers to deliver siRNA directly into cells without using the delivery reagents, which can affect the results of their experiments. Because this can be applied to many types of cells, it opens the door for significant new biomedical and pharmaceutical research. And then in our microbiology business, we received FDA clearance for a new MRSA test called Spectra that can screen patients for staph infection when they are admitted to the hospital. Our test is highly accurate, provides results in 24 hours, is easy to administer and is very cost effective. This means that more medical facilities will use it and more patients will be protected from this life-threatening infection, which is often called the superbug. And then finally, we introduced our first Fisher Scientific catalog in Chinese, targeted specifically to the growing demands of customers in research, testing, and processing facilities in that country. This is a great opportunity for us to leverage our strong Fisher Scientific brand to establish a strong customer channel in China. We continue to see double-digit growth in Asian markets and are investing heavily to expand our presence there, primarily in China and India. The Chinese catalog is one example. Our acquisition of Qualigens Fine Chemicals last year is another example, making us the leading laboratory chemical supplier in India. In addition, construction of our new clinical packaging facility is underway and should begin shipping supplies this fall. So, final words on guidance before I hand it over to Pete. To wrap up here, we feel very good about our prospects for overall growth and fully expect to deliver on our financial goals for 2008. Last quarter, we said we expected to report revenue growth of 8% to 9% over 2007 and we now expect our revenues to be in the range of $10.6 billion to $10.7 billion for 9% to 10% growth. This is primarily the result of more favorable currency translation. Our increased revenue estimate also leads us to raise our adjusted EPS guidance by $0.02. We now expect to report a range of $3.07 to $3.17 for 2008, which is a 16% to 20% increase over 2007. So with that, I'll turn the call over to our CFO, Pete Wilver for his financial review. Pete?

Thanks, Marijn. Good morning everyone. During the first quarter of 2008, we realigned our product portfolio to transfer a few small businesses representing approximately $70 million in annual revenue from the Analytical Technologies segment to our Laboratory Products and Services segment. The 2007 data in our earnings release and in my comments today has been restated to reflect those changes. And since we completed our first full year as Thermo Fisher Scientific last quarter, we no longer have to talk about pro forma comparisons to the prior year. As Marijn said, we had another strong quarter with 25% growth in our adjusted earnings per share to $0.74 compared to $0.59 in Q1 last year. GAAP earnings per share in Q1 were $0.53, up from $0.31 from the prior year’s quarter, primarily as a result of improved operating performance and lower merger-related charges, partially offset by higher acquisition intangibles amortization. Our press release contains a detailed reconciliation between GAAP and adjusted EPS. Revenues in Q1 increased 9% year-over-year to $2.55 billion. Organic revenue growth in the quarter was 4%, excluding favorable currency translation of 4% and acquisitions net of divestitures of 1%. Organic revenue growth in the quarter, particularly in our consumables businesses, was negatively impacted by two days or between 1% and 2% as a result of a shift in the Easter holiday from Q2 and having one less day in the fiscal quarter as compared to Q1 2007. Bookings slightly exceeded revenues in the quarter by about 0.5%. In the Analytical Technologies segment, Q1 revenues rose 10% on a reported basis and 4% organically. In the quarter, we saw good organic growth in our life sciences and healthcare markets. However, a few of our smaller industrial markets showed some softness later in the quarter. Our new product introductions continue to be a growth driver, specifically in our mass spectrometry and environmental product lines. In the Laboratory Products and Services segment, Q1 revenues increased 9% on a reported basis and 4.5% organically. During the quarter, our research and healthcare catalogs and our biopharma outsourcing services business all exhibited strong growth. This was partially offset by continued top line weakness in our safety catalog business, which negatively impacted total company organic growth by approximately 1%. By geography, we saw organic growth across all our major regions with the exception of Europe, which was essentially flat against particularly strong growth in the year-ago quarter. North America grew at slightly below the company average and Asia-Pacific grew in the high-teens. The rest of the world grew at close to 30% albeit from a very small base. Q1 adjusted operating income increased 19% year-over-year to $447 million. Adjusted operating margin was 17.5%, up 140 basis points from 16.1% in the year-ago quarter. The margin expansion was driven by pull-through on our incremental organic revenues, including increased prices, our integration sourcing and productivity initiatives, and slightly lower stock compensation expense. Analytical Technologies’ Q1 adjusted operating income increased by 23% year-over-year and adjusted operating margin was 21%, up 220 basis points versus 18.8% last year. Laboratory Products and Services’ Q1 adjusted operating income increased by 15% and adjusted operating margin increased by 60 basis points to 13.9% as compared to 13.3% in the prior year. Adjusted gross margin was 41.1% in Q1, up 66 basis points from 40.5% in the year-ago quarter, primarily as a result of price increases net of inflation, volume leverage, and the impact of our sourcing and productivity initiatives. We are continuing to see increased inflationary pressure on our raw material costs, primarily in steel, copper, and plastics. Adjusted SG&A was 21.2% of revenue in Q1, down 66 basis points from 21.9% in the year-ago quarter, primarily as a result of volume leverage and integration synergies. R&D expense was 2.4% of revenue in Q1, down 13 basis points from the year-ago quarter, primarily as a result of volume leverage. Moving to below the line items, adjusted net interest expense was $20 million in Q1, down $8 million from the prior year, primarily as a result of reductions in our debt and increased cash. Other income was a loss of $1.5 million, down $3 million from the prior year, primarily as a result of currency translation losses on foreign entity cash. Our adjusted tax rate for the quarter was 24.3%, in line with our full-year 2007 actual and 2008 forecast rate of 24%. The Q1 2008 adjusted tax rate was down 0.7% from the prior year, primarily as a result of the tax planning we implemented during 2007. Average diluted shares were 436 million for the quarter, down 5 million from last year and 4 million from the prior quarter, reflecting the benefit of the share buyback program we initiated in Q3 2007. During the quarter, we used $102 million to repurchase 1.8 million shares, which completes our outstanding $1 billion share buyback authorization, which resulted in a total repurchase of 18.2 million shares. In terms of balance sheet performance, we ended the quarter with $748 million in cash and investments, up $109 million from Q4, as our free cash flow was partially offset by share repurchases. Our debt was essentially flat with the prior quarter at $2.2 billion. Accounts receivable days sales outstanding was 56 days, up one day from the prior year. Excluding the quarter-end versus average impact of foreign currency translation, which ramped up significantly towards the end of the quarter, DSO was flat with the prior year. Inventory days of supply was 75 days, down one day from the prior year. Excluding the impact of average versus ending foreign currency translation, inventory days of supply improved by two days versus the prior year. Finally, Q1 cash flow from continuing operations was $243 million and after deducting net capital expenditures of $53 million, free cash flow from continuing ops was $190 million. Moving on to our 2008 guidance, we are increasing our full-year reported revenue guidance by $100 million to a range of $10.6 billion to $10.7 billion, primarily as a result of favorable foreign currency translation. This range represents 9% to 10% growth versus our 2007 actual revenue of $9.75 billion. We are also increasing our adjusted EPS guidance by $0.02 to a range of $3.07 to $3.17, as a result of the higher revenues, which represent 16% to 20% growth versus the $2.65 we reported in 2007. With that, I’ll turn the call over to the operator for Q&A.

We are open for questions. Question and Answer

Thank you. [Operator Instructions]. Our first question is from Jonathan Groberg with Merrill Lynch. Go ahead, please.

Good morning, thanks for taking the call. Congratulations on a good quarter.

Thank you Jonathan.

I just had a couple of questions, the first one relating to Pete's comments about commodities and we continue to see all of these prices go up at fairly rapid levels. So, I am wondering what's kind of the lag between when you are seeing that commodity price inflation show up in your manufactured products and your ability to pass on the prices to your customers?

Well, it impacts us mostly in the areas where we are fairly vertically integrated. So, we are actually buying the raw material and bending and painting steel and things like that. We see that impact relatively quickly in those areas and that we started to see it in the second half of last year and in Q1, it ramped up a little bit. We see it probably with a higher lag, where we are buying subassemblies and components that have those materials in them because our suppliers have a harder time passing those costs on to us. So, it's somewhat of a mix, but I would say, we are seeing the impact pretty heavily right now. I don't think there is another lag that we’ll see, a bigger impact going into Q2 or Q3, if that's your question.

And do you think... are you able to pass that pricing on or are your prices… for these types of items, is that an ongoing negotiation or do you have list prices that are going to last kind of throughout the year?

It's difficult to pass those costs on directly on those types of products. Certainly, our competitors are seeing the same thing that we are in those areas. So, if this continues on, certainly the market price should go up on those products, but in the near term it's hard to pass those cost increases on directly to customers.

But what you’ve seen in the last little bit, you are still comfortable with your kind of margin expectations for the year?

Certainly. Even though we saw pretty significant material cost and inflation, if you look at our net sourcing savings we’re still positive. So, we're saving more money on material than the inflation is costing us.

Okay, great. And then, Marijn, can you address… there has been a lot of talk around the hospital-acquired infections and [inaudible] much about some of your diagnostic capabilities. But can you maybe address in a little more detail why you think that your MRSA solution is going to be well received by hospitals relative to some of the molecular tests that may be a bit more rapid out there?

Well, yes. It's just a price difference, our test cost about $3 and these rapid tests cost $30. And in some European countries, where this screening has started a number of years ago, that the number of infections, patients that get infected with the superbug in a hospital has not basically dwindled down to negligible levels. So, I mean it's very obvious that the screening upfront of patients coming into the hospital is the right thing to do to avoid these infections. But it's been incredibly expensive and we are now coming out with something that only cost $3, 10 times less than what’s typically used on what is a more rapid test. So, we think there will be great reception for that price difference in the market and it will allow more hospitals this time screening it, even though it takes a day rather than just a few hours.

And what was the... I'm sorry the time difference previously, so this one I think is about 24 hours on your new test, I think, and in your press release you said and what was it previously?

Well, I think it has to do more with accuracy. So, you really get now a definitive result. I mean I think the previous tests were… similar tests were also 24 hours, but much less definitive and you would have to do a follow-on test if you saw certain results, so that would make it take another 24 hours.

Okay.

Well, now after 24 hours you have the definitive answer.

Okay. Great, thanks a lot and congratulations.

Thank you, Jonathan.

Thank you. Our next question is from Derik De Bruin with UBS. Go ahead, please.

Good morning.

Good morning, Derik.

So, I've been getting a few questions about the product testing inspection market and some of the growth opportunities there, specifically it's like that... are these markets potentially more cyclical than some people expect given that the economies are under pressure? And also the fact is you’ve got the Beijing Olympics coming out and there is some concern that China might pull back in terms of the spending as it's happening? Just talk about how you see the product inspection and safety market, food safety market, something like that just expanding and... just a little bit in terms of what you see in the past through economic cycles in those markets?

Yes. Derik, it’s a very difficult question, actually a good question, a very difficult one, because I do not think that in the previous economic downturn cycle in 2001-2002 we were importing as much food and related items from China as a western world as we are today. So, the way I view it is, it's very hard to predict with absolute certainty how strong these markets will be by quarter. But I do believe that the world has gotten increasingly nervous about what's going on in terms of food quality inspections like we are just talking about, lead and paint, which was another, big to do a few quarters ago. And that the world is much more alert of what is safe, what's healthy, what's clean than even eight years ago. And I think it has a lot to do with the fact that the world has become a lot more global. There is much more easy transfer of products and goods across the world, including things that we put in our bodies. So, with that I think the need for compliance with western quality control systems for anybody who wants to import into the western country is going to be more and more relevant. And as you know, China and India are developing their economies, they will have to beef up their capabilities to meet these western standards. So, I don't think that's going to go away in an economic cycle necessarily if they want to continue to export.

Okay, that's great. And I just want to kind of stick on the safety thing for a minute and go to the catalog safety business.

Yes.

That's been... I mean that dog hasn't hunted since like Fisher had it back in 2005 and I'm just wondering when you are going to pull the plug on there? What's your expectations there?

Well, we don't... we won't pull the plug on it. And let me just explain what the situation is. We basically have a number of Fisher catalogs and you could say we have a research catalog, we have a healthcare catalog, and we have a safety catalog. And the safety catalog is by far the smallest one, has about $350 million of revenue, but it's completely integrated with the other catalogs. So, it's being served out of the same warehouses, the same back office, the same basic infrastructure that supports it. So, it's very... it's basically impossible to break it up, okay, if we would want to. And so what has happened is that the base business of that safety catalog is doing fine, it basically mostly serves laboratories or some industrial environments with safety gear. And it's doing fine just like the overall research catalog is doing well. That part that isn't doing well is anything that has to do with preparedness for terrorist attacks or fire or anything Homeland Security related, Army, things like that because the government is really not spending a lot of money right now here in the US on domestic preparedness and all the money is spent obviously overseas, okay. Now, we had a huge ramp up in spending in that area into 2002, 2003, 2004 time frames, very good times and now it's coming down and it's coming down very, very significantly. So, it's a small part of the business, but it's coming down a lot. But my point is, at some point it will level off to maybe next to nothing, but it will level off and that's not far away by the way, that time frame. And it's all supported through the same back office structure any way, so that there is no ability for us to carve it out or do something creative with it divested. It just… it is what it is. And on the other hand, I hate to say this, but we're only one terrorist attack away from that business booming again, okay. So, it is serving a need, the business is there. We are capable of serving the customers when they need it, they just don't need the products right now. And it makes for a tough year-over-year comparison because as Peter said, it cost us 1% organic growth for the whole company. But it is what it is, and over time over as some quarters go by here in 2008, we will... we will see less decline, because it just cannot decline much further, quite honestly.

Thanks for the color. But unfortunately, it doesn't make me feel any safer.

No, no, I can see that. And that was not the context of my comments.

The only point Derik is, that dog actually did hunt Q1 last year, that business actually showed growth last year. So, it was a really tough comparison, the comparisons, as Marijn said, get easier as we get through the year.

Thanks.

Okay.

Thank you. Our next question is from Tony Butler with Lehman Brothers. Go ahead, please.

Thank you very much. A couple of questions, Pete. You made a reference to some of the small industrial market… end markets having slowed and then just like for you to explore exactly what those may be from a Thermo perspective? And then Marijn, last quarter you made reference to having pretty good visibility on at least six months out, maybe even a little longer on your overall business and now that we are at quarter end, can you make some more qualitative comments as it relates to your vision? Thanks, again.

Tony, the second question is also related to the industrial markets, I assume, the six months out?

That is correct.

Yes. So, what we say, I'll take both questions because they are connected. We've seen, as I said in my prepared comments, particularly towards the end of the quarter some softness in some markets and they are relatively small markets for us. But semiconductor, basically anything that has to do with semiconductor equipment. Semiconductor production is very weak and also oil and gas was weak as an end market in terms of demand at the end of the quarter. Again, a small markets for us, but that's what we did see. The other markets have continued the way they are, basically still stimulated by high commodity pricing, that lets people to want to continue to invest in expansion of that capacity. And the comments I’ve made in the past about our visibility in that is actually not that we have specific visibility, but we do have a relatively significant backlog typically in process-oriented applications. So, if people are going to be building a new mine or a new steel plant and commodity prices drop in the middle of that project, they are not going to just let it sit there half finished, they will finish it off. So, we then have an opportunity, even though commodity prices would have come down significantly, to deliver those orders, that iron backlog, and that's why there isn't an immediate effect from process instruments typically onto our revenue in a specific quarter. Does that make sense?

It does, Marijn. Thank you very much.

Thank you, Tony.

Thank you. Our next question is from Ross Muken with Deutsche Bank. Go ahead, please.

Hi, good morning gentlemen.

Good morning, Ross.

Good morning, Ross.

I think the commentary on new product introductions is certainly encouraging. You guys have done a phenomenal job of this over the last few years. Are we getting to a point where it's going to be harder and harder to sort of move that metric that you guys track in terms of new product introductions comprising a certain percentage of current sales. Are we sort of hitting diminishing returns there? Is there still a lot of leg way to go? And then is that part of the reason gross margins exceeded and came in at such a high level for the quarter because typically you obviously get good pricing on sort of your new product introductions?

There is no end to our capability to come out with better and new products. There is no saturation there. I mean you have to work hard on it, but [inaudible] the same thing as saying that the first Apple Computer was the best it could ever be, there really is no end to innovation. And if you think about what our customers are trying to do in the laboratory, the complexity in terms of life science and how many questions are still unanswered in life sciences and healthcare. Then the complexity of precisely measuring things like the superbug and lead in toys that are already on the store of... in the store of toy manufacturers. I really don't see an end to the need for better new products and I don't see an end to our capability to deliver them. So, that process will be ongoing. There is a trend here that I think our customers want the products to be easier to use. It’s harder and harder for them to hire first-class scientists or chemists or biologists to do to work in the laboratory, that has become more complicated. So, there is a lot of focus on not just how good of a quality experiment can you do, but how easy is it to do the experiments and that leads to a whole different set of innovation that are also fueling our future growth. And then you are right, I mean typically when we come out with a new product, we do sell it at higher margins than older products and it helps us drive our margin improvement. It has done that over the years and I believe it will continue to do so.

And as we look at sort of the big pharma group as a customer, could you sort of compare contrast what you saw during the quarter in terms of their spending habits relative to sort of Analytical Tools versus Lab Products. Was there any sort of difference at buying pattern, especially sort of on the higher end of instrumentation of consumables and was there... the demand pattern sort of relatively stable throughout the quarter or did we… sort of weak start and then maybe a stronger close to the quarter?

Well, it's a complicated question, but essentially we did well with large pharma in the first quarter as a company. And I think it has a lot to do with our specific focus at the corporate account level of tailoring to the needs of large pharma in particular because the strategy we’ve talked about in the past is, large customers are buying inefficiently and we are trying to help them buy more efficiently and that leads to some share gains for us. So, we did well with large pharma, at the same time I think some of our peers have said that in Europe, in particular, it was a slow quarter for higher-cost items in large pharma and we saw the same thing. So, we did see the same behavior in larger European pharma company of delaying... hopefully delaying orders.

And I just want to sort of follow-up one quick thing to that. So, when you announced the Fisher deal, one of the longer-term stories on the revenue synergy line was obviously sort of the ability to continue to drive more share within the big pharma customer base and really focusing on sort of the top-20 accounts and being able to capture a bigger piece of that pie. Given your commentary around what you saw in first quarter, do you feel one year into the deal that you're finally starting to get some momentum relative to that effort and… or maybe not sizeable amounts of revenue moving the needle really, but sort of to the point where you feel like that sort of initial thought is finally starting to manifest itself in your P&L?

Yes, I mean it is and it’s different for every different pharma, you cannot generalize. The pickup on that is different by account. Some pharma customers are very, very interested in doing this and are really working with us to drive a level of standardization of laboratory supplies that they haven't had before and others aren't maybe that interested at this particular point in time not because they are not interested in the efficiency that could come from it or the savings, but it's just not yet a priority for them. But as we've talked about before, Ross, we are a strong believer that even big pharma at some point will have to become an efficient buyer of all the goods and services that they buy and we’ll be well positioned to serve them in that context.

And just actually one sort of quick other follow-up. Relative to your commentary around sort of less selling days and around sort of the movement of the Easter into the March... March quarter, is that also, Pete, part of the reason why Europe was probably a little weaker maybe than sort of expected coming in relatively flat for the quarter despite having also a tough comp from last year?

Yes. Certainly, we don't have any way to [inaudible] prove that, but certainly you would expect the Easter holiday to have a bigger impact on Europe just because they tend to take more of an Easter week rather than one holiday.

Perfect. Thank you very much.

But they’ll make it up some other time.

Great.

Thank you. Our next question is from John Sullivan with Leerink Swann. Go ahead, please.

Hi, guys good morning. Can you hear me?

Yes.

Great. A couple of quick ones. First of all, can you just talk about opportunity that you feel like is still available to you at the facilities level both from the Fisher deal and in your own business. Do you feel like you have significant consolidation opportunities still available to you?

Yes. John, good morning. Yes, we do. And that's been part of our cost synergy plan for the first three years after the merger. I think we’ve talked about... about eight factories that we felt that we could close strictly as a result of the merger between Thermo and Fisher. And that's into works. I mean the announcements have been made in most cases and this will be happening over the next day year-and-a-half.

Thanks very much. And then could you talk about the hospital business just a little bit. And specifically I'm just wondering it's around 20% of your revenues. As a distribution channel, do you feel like you have a lot more room to put more products through to the hospital clients and is that a priority for you?

Yes. I mean the 20% is roughly… 10% of it is… 10%, half of it is our specialty diagnostics capability, which is all self-manufactured and diagnostic testing, anatomical pathology to microbiology, I was talking about things like that. And then the other half is a catalog, customer channel catalog that we have that services the healthcare market and that's the other half of the revenue. And if you ask about our abilities there to put more products through that catalog, certainly we believe we have a very strong franchise there and it has a very good reputation and we are having multiple discussions with suppliers to see if we can broaden the scope of what that catalog offers. So, we do believe we have opportunity there.

And then just to kind of circle back to the first comment on the hospital business, obviously this MRSA test that was just approved, you already have full distribution capability for that test, right?

Yes.

Okay. Thank you very much.

Okay. Thanks, John.

Thank you. Our next question comes is from Quintin Lai with Robert W. Baird. Go ahead, please.

Hi, good morning.

Good morning.

As we are... just to follow-up on Ross' question, but to focus on the consumables side. This earnings season we've seen some pretty decent numbers on the pure play consumables companies. Then they also mentioned price increase, could you kind of decouple the maybe softness in European large pharma with respect to overall consumables and price?

Let me think about it. I mean the consumables business has a number of expectations [ph], high ends, life sciences, reagents and then you have the more routine consumables that are being used in laboratories. And I think your question must be related to high ends, life sciences, reagents if you compare it with some of the peers, right?

Yes, that's right.

Yes. So, I think that business is doing quite well, in general. But it depends very much... it's very application dependent, for instance anything that has to do with cell research is doing very well, cell science. Anything that has to do with RNAi is doing very well. Things that have to do with novel DNA sequencing doing well. But there are also other applications that are not growing so fast and they tend to be the more mature applications. So, it's hard to generalize because they are really... it's almost like... almost like what’s in fashion on the consumables side in terms of growth. And you see, I think, more than an instrument a relatively big swing over a number of years of where people are spending the money. And it has, I think, a lot to do with scientists who don't work in cell biology or don't work in RNAi, for instance, deciding the best scenario they want to get into and really become new customers for consumables in that field.

Thank you for that. And then, Pete, with respect to cash flow guidance, forgive me, did you give... provide an update on that and could you give us a little bit more color on potential for a new authorization for share repurchase or future M&A?

I didn't provide updated guidance on the free cash flow. Last quarter, I had said something in the range of $1.2 billion. We had good cash flow in Q1, but nothing that would kind of indicate to me that we ought to go to change that number at this point. So, I stick with something in the range of $1.2 billion for the year and we’ll assess it again at the end of Q2. In terms of the share buyback, we really don't talk about future plans on share buyback authorizations. Obviously, that's a Board decision. But, certainly with $750 million of cash on the balance sheet, certainly we have a strong M&A pipeline and our goal was always to use our cash on our balance sheet to create value for shareholders. So, I don't think you'll see that cash sitting around for a long time.

Thank you.

Thank you. [Operator Instructions]. Our next question is from Peter Lawson with Thomas Weisel. Go ahead, please.

Pete, what was the driver in gross margins in the quarter? What was the… I wonder if you could quantify, was it… was there pricing or volume or savings?

It splits about a third, a third, a third, between the pull-through on incremental organic, including price increases, integration synergies, and then the net of sourcing savings offset by inflation, and all of the productivity initiatives that we embark on with our PPI program.

And do you feel all three chunks sustainable for the year?

Certainly, yes.

And then Marijn on the oil and gas weakness, is that continuing into the second quarter, and is that mostly associated with high ASP weaknesses or is it across the board?

I don’t know. I honestly don't know. It's too early to tell, to see whether or not that is systemic or not. It is a little bit of the surprise to me quite honestly because I wouldn't say that the oil and gas companies are really suffering right now, but maybe there is a level of saturation that they have reached in terms of their need for new instrumentation, this is process instrumentation particularly flow meter. So, that’s too early to tell, Peter, too early to tell.

Okay. So, it wasn't just on high ASP equipment?

No, no. Actually to the contrary, it was more on some basic relatively routine instrumentation.

Right, okay. And then sorry, Peter, the amount of reclassification from the Analytical business, how much was that or what were the pro forma numbers?

It's about $70 million that moved on an annual basis from Analytical over to Laboratory Products and Services. And those numbers are in our analyst package that's out on the website.

Okay. Thank you so much.

Yes.

Thanks, Peter.

Thank you. Our next question is from Jon Wood with Banc of America Securities. Go ahead, please.

Thanks. Marijn, has the acquisition pipeline changed at all thus far in '08? Are you seeing more properties available and have valuation expectations changed at all?

Maybe yes, slightly more available. I would say valuation expectations have not really changed, but obviously private equity is much less in the mix as it used to be as a potential competitor for those properties. So, valuation expectations may not have changed, but for smaller private companies the fact that there is really not a lot of private equity interference any more may help prices to be more reasonable.

Has the size of the opportunities changed at all?

No, I mean most of them typically are between $10 million and $100 million, the tuck-in acquisition, and that's the majority of them and then whether or not a bigger company becomes available is… I don’t know, that's so hard to predict and the circumstances of that usually are unique company by company.

Okay, great. On the clinical lab side, if I'm not mistaken you recently picked up the Quest [ph] contract, is that piece of business material and has it started yet?

Yes, it’s good business, it’s material in the sense that any new business we pick up is material to us, but no it's a very good contract and it has already started. Yes.

Okay. And then one last one on the stock comp. Is that still expected to increase by three pennies this year?

No, it's probably going to be more like $0.01 for the full year. Q1 was particularly low. You can’t take Q1 and multiply it by four and get the full year. You'll see a ramp up in Q2, Q3, and Q4.

Okay.

Up to around… I think it’s around $0.09 for the year.

Okay. Thanks a lot.

Thanks, John.

Thank you. Our next question is from Tycho Peterson with J.P. Morgan. Go ahead, please.

Hi, good morning.

Good morning, Tycho.

I appreciate the additional color you guys gave on the... kind of the pharma spending trends. I guess the question is given the headlines about pharma in general kind of moving to reduce the global R&D footprint and the fact that you guys typically have pretty good early indicators with the workstations business. I mean are you seeing new lab space being built out or is most of the growth you're seeing coming from higher volumes at existing accounts?

No. I think the overall laboratory builds as far as we can tell because that's not… not that easy to track. But as far as we can tell, it's relatively stable compared to 2007. So, there doesn’t seem to be a big change there. I think the piece that a lot of people forget is that or forget or not always think about is that, of course, CROs are doing very well. They are building out lab space because they are basically doing work that before would happen at pharmaceutical companies. So, there is a shift there of work and therefore a shift of tools that come with it. And actually I said it before, that drives in some cases to an accelerated replacement cycle that I think our industry is benefiting from right now.

Okay. In terms of some of the operating initiatives you've laid down in the past, in particular things like PPI. Can you give us a sense as to where we are maybe in the implementation of lower cost sourcing some of these initiatives? They’ve obviously been nice drivers of margin expansion. Where are we in the life cycle’s implementation and then also just in terms of divesting and trimming the portfolio, is that still a focus?

Well, on PPI and the other operational discipline areas like sourcing, local sourcing, rationalization of factory, that really stems from eight years of experience now on the Thermo side of driving that operational discipline. And we've sort of got them reinvigorated in terms of opportunities with the Fisher merger, because not all of the Fisher businesses have that level of operating discipline. So, we are implementing those principles, particularly PPI, into some of the legacy Fisher businesses. And that gives us a lot of opportunity to improve our processes for the next three years to five years, I would say, because it is not a turn of a switch. This is really an ongoing continuous improvement plan. On the divesting point of view, we are very happy with our portfolio. We'd like to strengthen it, we don't spend a lot of time thinking about divestitures quite honestly. I mean maybe some small loans here or there, but it will be very minor.

Okay. And then finally, you had talked a while ago about the initiatives in disposable biomanufacturing. Can you give us a sense as to where we are in that business and how you view that opportunity plan out over the next year or two?

The opportunity is terrific, we believe, because it is done to grow more and more in the bioprocess area to disposable biomanufacturing rather than all these clumsy steel tanks that take forever to clean out. So, we have a very good position in terms of biodisposable reactors and the bags, the containers, things like that. We are actually expanding our capacity in Logan, Utah to serve that demand. So, that's going well. I do believe that overall the bioprocessing industry is in a little bit of a slowdown, which has I believe more to do with some individual issues with certain drugs at some of the biotech companies. But the long-term trend for that, I believe, is very positive.

And do you see a lot of opportunity for pull-through, I guess, from that business maybe as you get specked [ph] into the process earlier on?

Yes. Because, it's the serum or the media and then the containers, the bags. I mean there... it’s huge… these people are looking for an integrated solution when it's available.

Okay.

Definitely. But it's not a laboratory, right? It’s a... very often... we have a small pilot facility in the lab, but we are not just servicing the small pilot, different scales of the pilot facility, very small and then media. And then you sort of get into production. And this has showed some of the pilot plans are relatively separate from the laboratory environment. Of course, the specifications are done in the laboratory environment, so it's good to have that relationship. But then it sort of moves away from the lab into really an independent pilot plant facility and then real production later.

So, I guess in terms of your detection capabilities, are there obvious derivative plays here for process monitoring and things like that?

Yes, there are. Yes.

Okay. Thank you very much.

I think we're out of time for questions. So, we will just wrap it up here. Marijn, do you have any closing comments?

Okay, yes, some really closing comments here. So, thank you again for being on the call and thanks for your support of Thermo Fisher Scientific. We believe we had a very strong performance this quarter again and are well positioned for the balance of the year. So, thanks and we are looking forward to update you again next quarter.

Ladies and gentlemen, thank you for your participation. That concludes the conference, you may disconnect and have a wonderful day.