Chris Shibutani, J.P. Morgan Chase - Analyst [2]
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Good morning, guys. I'm hoping I can focus a bit on the mass spec business,
yours specifically as well as in the industry -- several competitors reporting
this morning, ABI (indiscernible) specifically. Can you comment upon the results
that you saw in the quarter, maybe describing a little bit about the different
products in the quarter and revenue trends in particular at DMS, and as well
what you think you're seeing in the market overall on a competitive basis, on a
growth basis?
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Marijn Dekkers, Thermo Electron Corp. - President & CEO [3]
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Chris, this is Marijn. As I mentioned in the opening comments, we introduced --
I didn't mention, but we introduced two brand-new products in the spring of this
year -- the LTQ-FT, which is a (indiscernible) transform mass spectrometer, and
then the LTQ, which is our new linear (indiscernible). In both cases, the
reception has been overwhelming, so very positive. We have very nice orders
(indiscernible) on both products in Q3. (multiple speakers).
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Chris Shibutani, J.P. Morgan Chase - Analyst [4]
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(Multiple Speakers) -- can you quantify that in any way at all, Marijn, in
terms of --?
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Marijn Dekkers, Thermo Electron Corp. - President & CEO [5]
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I don't want to quantify that, Chris, online. Overall, our revenues in the
whole mass spec business were about flat year-over-year, so we saw, in contrast
to the first two quarters, where we clearly had revenue growth in mass spec, we
saw a slowdown there. We think that the major reason for that is our customers
evaluating our two brand-new products and slowing down the purchases of the
older products that they are replacing, particularly the linear (indiscernible)
replacing our more traditional iron track. So, that's what we think is going on.
It looks like, overall, the fourth quarter will be a strong quarter for mass
spectrometry, looking at our orders for the new products.
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Chris Shibutani, J.P. Morgan Chase - Analyst [6]
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The book-to-bill, the order growth trends seem to be improving. Can you
highlight which particular customer segments may be driving this?
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Marijn Dekkers, Thermo Electron Corp. - President & CEO [7]
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For mass spec in particular, or --?
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Chris Shibutani, J.P. Morgan Chase - Analyst [8]
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For the overall business and Life & Lab Sciences in particular?
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Marijn Dekkers, Thermo Electron Corp. - President & CEO [9]
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I think we see -- as we've said before, we see clearly more activity with
pharmaceutical customers, clearly -- larger pharmaceutical companies, and not
somewhat with the biotechs yet; that's still (inaudible). Then I would say, in
addition to that, just like we see in Measurement & Control and Optical as well,
it seems like some industrial customers are coming back.
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Chris Shibutani, J.P. Morgan Chase - Analyst [10]
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Perfect. Theo, if you could just remind us where you stand on share repurchase
outlook?
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Theo Melas-Kyriazi, Thermo Electron Corp. - VP & CFO [11]
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We bought slightly less than 500,000 in the quarter. There has been a big
rampup in acquisition activity here, and as we described last quarter on the
call, at this point, we're spending more time on looking at acquisitions rather
than aggressively buying back our shares.
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Operator [12]
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John Harmon of Needham & Company.
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John Harmon, Needham & Co. - Analyst [13]
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Good morning. A couple of questions, please? First of all, can you give us the
status of Act II (ph)? Is there much left to do in the fourth quarter? Are you
ahead of schedule, behind schedule?
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Marijn Dekkers, Thermo Electron Corp. - President & CEO [14]
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Act II (ph) is essentially complete. You know, the way we talked about it
internally, 2004 will be all Act III (ph) and no longer Act II, so we are
cleaning up some details of Act II. There are a number of factory consolidations
that are still going on; they've all been announced. A lot of our commercial
office integrations have happened. So, Act II is essentially over, but that
doesn't mean productivity is over. Let me just emphasize that -- because as have
restructured and integrated, we've also initiated a brand-new productivity
program, which we call PPI, Practical Process Improvement. It's very similar to
Six Sigma -- across the Company.
So, we're going from really an integration, which you could almost call brute
force productivity situation over the last few years, to more of a continuous
productivity culture. We expect to continue as a result of that -- to keep our
productivity momentum, be it in a different way; it will be more through lean
manufacturing, demand flow technology, in general improving our processes, our
working processes in the Company rather than in the brute force way or closing
down facilities like we've done in the last few years.
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John Harmon, Needham & Co. - Analyst [15]
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Thank you. The second question, at your Analyst Day this year, you were talking
about your 2006 goal of earning $1.60 per share. One of the assumptions was 5
percent organic revenue growth. So far, it's not really going in that direction.
Is that goal still attainable, or is it delayed? What measures would you take if
organic revenue growth doesn't pick up in the near-term?
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Marijn Dekkers, Thermo Electron Corp. - President & CEO [16]
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I think that, over a three-year period, we think 5 percent organic revenue
growth is easily achievable. I mean, I'm not saying it's easily, but achievable,
let's put it that way. We have all -- you know, with the declines we've seen in
the last two years, we are longing back for the days that it will be positive
revenue growth because we know it will have a lot of opportunity for leverage
for us on the bottom line.
We had expected to get some revenue growth already in the second half of this
year; it's obviously been delayed. In spite of that, from a productivity point
of view, we will be in the range of our EPS guidance for the year. So, we've
accelerated productivity programs when we saw (sic) that the topline wasn't
coming through. We can continue to do that for a period of time, but you know,
I'm pretty confident that there will be a turnaround over the next two, three,
four quarters from a topline point of view that should get us on track of 5
percent topline growth for the next three years.
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John Harmon, Needham & Co. - Analyst [17]
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Thank you. Final question -- it looks like that your Optical segment returned
to profitability, at least on an adjusted operating basis. Is this sustainable?
Has the business turned around, or where do you think it's going from year?
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Marijn Dekkers, Thermo Electron Corp. - President & CEO [18]
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We were very pleased (indiscernible) Optical Technologies. If you recollect
what Theo said about orders -- double-digit orders improvements in Q3 over Q2 --
so it seems that there is a beginning of a recovery there. I have to say, if we
can make a little bit of money at the bottom of the curve here, I'm confident
that we can leverage more orders into improved profitability very quickly there.
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Operator [19]
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Mirov Kovav (ph) of UBS.
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Annabelle Sanimi, Merrill Lynch - Analyst [20]
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This is actually Annabelle Sanimi (ph) with Merrill Lynch. I had a quick
question about -- you once in the past talked about a small pilot program with
your key accounts, where your focus on, I guess, the (indiscernible) drove 14
percent revenue growth. Can you extrapolate that into your broader Life Sciences
business and when we might start seeing some impact of that and having a
turnaround in the whole business in general?
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Marijn Dekkers, Thermo Electron Corp. - President & CEO [21]
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Yes. We have a corporate account initiative that actually is broadening well
beyond (inaudible) those first eight customers. We're tracking those eight in
particular, but we've broadened that significantly since the beginning of the
year.
Yes, we are doing very well in those particular accounts, although those
(indiscernible) have gotten the key account manager who is coordinating our
activities on those accounts and are focused on cross-selling.
To extrapolate that across the board, we feel, at Thermo, that we were
under-penetrated at the larger accounts because, historically, we've presented
ourselves as so many different brands to so many small suppliers that we never
got the benefits of being under one brand and being viewed as a large supplier
(indiscernible) supplier to those big companies. So if you hear 14 percent
growth at the key accounts, I don't think that's translatable to the University
of Arkansas, for instance! But these big accounts are major and our internal
goal over the next three years is to double our sales at those 20 key large
pharma and biotech accounts, which we believe represents an additional $60
million in revenue. So, we're doing well there, but I wouldn't say that it's
representable completely across the entire sector, because those big accounts
really have extra focus.
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Annabelle Sanimi, Merrill Lynch - Analyst [22]
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Okay, great. Also, if you can speak a little more specifically about your Life
Sciences business -- you said that there was still some weakness in capital
spending, that there was some growth in Diagnostics, and I guess more
consumables like products. Can you talk more specifically about what
(indiscernible) Life Sciences business, like your mass spec was flat, for
example, so is it more like spectroscopy, crimatography (ph)? What's going on
over there?
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Marijn Dekkers, Thermo Electron Corp. - President & CEO [23]
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If you look at the press release, we say there's two areas of strength for
Infomatics (ph), basically Laboratory Information Management Systems, which has
been doing quite well for a while now, and also Clinical Diagnostics, which is a
very steady business with less sensitivity to economic cycles, compared to most
of Life & Laboratory Sciences that's more R&D focused.
In the previous few quarters, we've also said that mass spectrometry was also a
clear driver for year-over-year growth. That was not the case this quarter, but
we expect that to be the case again in Q4.
Weaknesses we see, still in more mundane laboratory equipment, mundane in the
sense of the lower-cost items -- freezers, centerfudges (ph), I mean,
expenditures with a customer that can be delayed. That has been an ongoing
trend. Then we see weakness in traditional industrial applications for
analytical instruments like, for instance, elemental or molecular spectroscopy
where we have an R&D complement to it but, also a quality control component to
those instrument technologies, which is slow because of the economy.
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Operator [24]
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Larry Neibor of Robert Baird.
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Larry Neibor, Robert W. Baird - Analyst [25]
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Good morning. What type of economic conditions would be required for Thermo to
show 5 percent organic growth?
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Marijn Dekkers, Thermo Electron Corp. - President & CEO [26]
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You know, we are typically trailing the true economic recovery by about two or
three quarters, because a lot of the products that we sell end up in
laboratories, or end up in manufacturing locations that might not be
(indiscernible) capacity. As you know, capacity utilization of a manufacturing
facility increases the need for our Instrumentation Technologies and the
manufacturing location increases. So typically, we are delayed by about 6 to 9
months. So, if we would have a true economic recovery today at the DuPont, the
DOWs, the Pfizers are all saying, we're back! You can think about a delay of 6
to 9 months in terms of those kicking in for us significantly. For us to growth
again at a 5 percent rate, we probably need a 3 percent GDP, okay? Because we
cycle a little bit deeper, higher and lower than, obviously, the overall
economy.
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Larry Neibor, Robert W. Baird - Analyst [27]
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What changed in the second half of this year in terms of what didn't happened
that you were expecting when you thought you would have revenue growth in the
second half?
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Marijn Dekkers, Thermo Electron Corp. - President & CEO [28]
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Well, I think that the economic recovery is slower than we anticipated. We've
been saying, and I think the whole world has been saying now for three years in
a row that the second half would be better. We were, I think, really expecting,
back in March, that the economic recovery was happening in the general economy
at that particular point, and therefore, 6 to nine months later, we would be the
beneficiaries for that in the third to fourth quarter. It didn't happen back
then; it seems to be happening right now. Therefore, we are delayed about six
months here.
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Theo Melas-Kyriazi, Thermo Electron Corp. - VP & CFO [29]
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Let me just add something. If you look at the overall economic picture, it
looks like there was fairly significant growth in the U.S. economy in the third
quarter, but better consumer spending really doesn't help us. We're much more
tied to capital spending. If you look at our competitors as well, clearly, their
capital spending is not quite as robust as people expected 6 or 9 months ago,
and so we are more tied to that.
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Larry Neibor, Robert W. Baird - Analyst [30]
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Right. One further question, please? In the order backlog in your Life &
Laboratory Sciences segment, what's the split in terms of order trends between
Life Science laboratories and industrial laboratories?
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Marijn Dekkers, Thermo Electron Corp. - President & CEO [31]
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That's probably 50-50. We've seen a recovery, probably 50-50, in both areas.
It's not one very much over the other.
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Larry Neibor, Robert W. Baird - Analyst [32]
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So you are starting to see a positive order trend in the industrial area?
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Marijn Dekkers, Thermo Electron Corp. - President & CEO [33]
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Yes.
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Theo Melas-Kyriazi, Thermo Electron Corp. - VP & CFO [34]
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Larry, in fact, we pointed out that bookings were up sequentially and were up
in all three of the sectors, so I think that's an indication, both in the Life
Sciences and to the industrial customers, we see somewhat better demand now in
the third quarter.
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Marijn Dekkers, Thermo Electron Corp. - President & CEO [35]
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Then with the refinements on (indiscernible) Life & Laboratory Sciences, the
pharmaceutical companies really seem to be ahead of the curve there compared to
biotech.
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Operator [36]
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(OPERATOR INSTRUCTIONS). Paul Knight of Thomas Weisel Partners.
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Paul Knight, Thomas Weisel Partners - Analyst [37]
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Well, all the good questions have been asked, but I've got a couple! You had
sequentially growth last year, Theo. That was due to the government orders. What
were those orders, once again?
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Theo Melas-Kyriazi, Thermo Electron Corp. - VP & CFO [38]
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There was $27 million of shipments. We had orders in the third and fourth
quarters last year and we shipped almost all of it in the fourth quarter. These
were explosive detection instruments that were installed at airports around the
country.
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Paul Knight, Thomas Weisel Partners - Analyst [39]
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Why was Q3 up sequentially last year? You know, 9 years prior, you have been
down I think sequentially.
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Theo Melas-Kyriazi, Thermo Electron Corp. - VP & CFO [40]
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Why was Q3 up sequentially in revenues last year?
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Paul Knight, Thomas Weisel Partners - Analyst [41]
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Yes -- or were we just working out of a recession at that juncture?
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Theo Melas-Kyriazi, Thermo Electron Corp. - VP & CFO [42]
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Honestly, I'm looking here -- Life and Lab Sciences was up sequentially a
little bit. I don't think that the bookings were up sequentially, so it was a
matter of shipping a little bit of backlog in the third quarter of last year.
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Paul Knight, Thomas Weisel Partners - Analyst [43]
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Okay. When does your Test and Measurement acquisition close, Theo?
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Theo Melas-Kyriazi, Thermo Electron Corp. - VP & CFO [44]
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It closed in the first week of the fourth quarter, so you can eliminate all the
revenues for the fourth quarter.
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Paul Knight, Thomas Weisel Partners - Analyst [45]
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What date in November does the French acquisition close?
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Theo Melas-Kyriazi, Thermo Electron Corp. - VP & CFO [46]
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We don't know; it's dependent upon government regulatory things in the
pipeline. We estimate it will close late in the fourth quarter.
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Paul Knight, Thomas Weisel Partners - Analyst [47]
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Okay. Just bond buyback -- no equity, you said, in the quarter?
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Theo Melas-Kyriazi, Thermo Electron Corp. - VP & CFO [48]
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No bond buybacks except the $197 million of debentures we redeemed on July 31st
and in terms of buybacks, just a little shy of 500,000 shares of common stock.
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Paul Knight, Thomas Weisel Partners - Analyst [49]
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Okay. |
