Feb 4, 2009
Executives
Kenneth Apicerno – Vice President, Investor Relations Marijn E. Dekkers – President and Chief Executive Officer Peter M.
Wilver – Senior Vice President and Chief Financial Officer
Analysts
Derik De Bruin – UBS Ross Muken – Deutsche Bank Sung Ji Nam – JPMorgan Quintin Lai – Robert W Baird & Co Anthony Butler – Barclays Capital Isaac Ro – Leerink Swann Jon Wood – Banc of America/Merrill Lynch Peter Lawson – Thomas Weisel Partners Doug Schenkel – Cowen & Company
Operator
Good day, ladies and gentlemen and welcome to the Thermo Fisher Scientific Fourth Quarter 2008 Earnings Conference Call. I would like to introduce our moderator for the call Mr.
Kenneth Apicerno, Vice President, Investor Relations. Mr.
Apicerno, you may begin the call.
Kenneth Apicerno
Good morning, and thank you for joining us. On the call today, we have Marijn Dekkers, our President and Chief Executive Officer; Marc Casper, our Executive Vice President and Chief Operating Officer; Pete Wilver, our Senior Vice President and Chief Financial Officer.
Please be aware that this call is being webcast live and will be archived on our website, thermofisher.com, until March 6, 2009. 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 of our fourth quarter 2008 earnings and future expectations is available in the Investors section on our website, under the heading Financial Results. Let me now briefly cover our 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-Q for the quarter ended September 27, 2008, 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 is representing our views as of any date subsequent to today. Also during this call, we will be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP.
A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our fourth quarter 2008 earnings and future expectations. And also in the investor section of our website thermofisher.com, under the heading financial results.
With that I would now like to turn the call over to Marijn.
Marijn E. Dekkers
Thanks Ken. Good morning everyone and thank you for joining us for a review of our 2008 results and our outlook for 2009.
I don’t have to tell you that the past year was indeed unprecedented in terms of the volatility in the global economy. With a fairly typical start and then as you know the world changed in September.
In spite of the dramatic downturn, I am pleased to report that we delivered on our financial goals for the quarter and the year. Even coming in towards the high end of our adjusted EPS guidance for 2008.
I can tell you how proud I am of the intensity demonstrated by our employees all over the world in achieving these results. This tremendous effort resulted in very solid Q4 performance and contributed to our strong results overall for 2008.
On behalf of our entire team let me take a quick victory lap and get right through the financial highlights. First on the fourth quarter.
Our revenues increased 1% for the fourth quarter record of $2.65 billion with 4% organic growth. Adjusted EPS rose 16% in the quarter, and we also reported significant adjusted operating margin expansion for the quarter with a 140 basis points of improvement over the previous year.
We are very pleased with the top line growth we were able to achieve in Q4 coming in at the high end of our guidance. In spite of the pressures on capital spending in some end markets.
We also leveraged our performance to generate excellent margin expansion and adjusted EPS growth. Now, as I've said on previous calls we run the company by focusing on four key financial metrics, and maintaining a balance between these four metrics.
They are top line growth, operating margin, earnings per share, and free cash flow. And our strong finish in Q4 contributed to very solid results for the full year in each of these metrics.
On the revenues, the revenues grew 8% to a record 10.5 billion. So, we have now passed the $10 billion mark, an incredible milestone for us.
In addition, we estimated that organic growth would be in the mid-single digits for the year and indeed we came in right at 5%. We also expanded adjusted operating margin by a 100 basis points for the year.
This led to a significant increase in our adjusted EPS with 19% growth. In addition, we strengthened our balance sheet and generated 1.2 billion of free cash flow in 2008.
So, we had very solid performance for the year, even compared with our strong results in 2007 pecked when life seem to be so much easier. Let me now spend a few minutes talking about what we are seeing in our markets today.
Overall the economic uncertainty is particularly affecting capital spending budget. This is where our product mix is a key advantage.
Two-thirds of our revenues come from recurring sales of consumables and services, while only one-third comes from higher price capital items such as instruments and equipment. The good news with Thermo Fisher is that, as you all know consumables and services typically hold better in the tough economy than higher price capital budget items.
We’re very fortunate to have built the portfolio that is rich with consumables and services. And then we feel that as a result, our revenues will withstand the test of these tough economic times better than most other companies.
And as a side comment, I quite honestly feel that in recent months, the stock market has not given Thermo Fisher much credit for our more resilient product mix. From an end market perspective, we’ve seen the following.
Academic and government. Academic has been holding up quite well so far growing faster than the company average.
While on the other hand, government growth has been slowing. The new federal stimulus package appears to be good news to us, but it's really a little too early to speculate about the direct impact of that on our business.
Then on large pharma, we all know about the pressures on large pharma and their conservatism in spending has accelerated in the past few months. Many large pharma companies have announced additional cuts in their workforces and are tightening R&D spending and there is now also some consolidation going on.
In spite of this, our revenues to large pharma in the fourth quarter are still growing faster than our company average. Our intense focus on meeting their needs in today’s environment is clearly paying off.
We believe we can deliver to these customers tremendous efficiency and productivity and the number show that they are becoming more and more receptive to our value proposition. Just as a side note, large pharma represent less than 10% of our revenues.
So, our exposure to any one customer is relatively limited. Now, as far as CROs are concerned, they obviously are highly dependent on overall pharma spending and we have seen their orders particularly on the capital side weaken in the past months.
In biotech, we are seeing a little bit of a mix picture, with large biotech continue to do very well, but biotech startup is becoming somewhat more conservative in their spending. On the healthcare side, where we are mostly in diagnostic testing, this market reportedly had been getting weaker.
We are not really seeing it on the consumable side, where we are heavily weighted, but we see some of it in a slower demand for instrument. And then the industrial market this is really clearly the most problematic area at the moment.
This is also the end market where we selling the highest proportion of capital budget items, particularly process instruments. Orders are extremely soft here pretty much across the board with the exception of food and beverage markets, which continue to do quite well.
So, wrapping up the comments on these markets and preparing for the 2009 guidance, the key takeaway here is that obviously 2009 will be challenging. However, even though some of our end markets are clearly under pressure, we feel that as a company we are extremely well positioned to weather this economic storm for really three key reasons.
First, we have a tremendously strong technology portfolio and as a result have the industry leading product and services offering. Second, the affected two-thirds of our revenue falls in the recurring revenue basket of consumables and services.
And then third, the affected two-thirds of our customers are in the life sciences and healthcare industries, which are less cyclical in this kind of an environment, compared to the overall economy. For guidance, shifting through financial guidance here for 2009, as I stated at the beginning of my comments, these are unprecedented times and nobody knows exactly how the year will play out.
Having said that, our estimates are based on what we know today and that includes a couple of key assumptions. With the ongoing economic uncertainty, capital budgets in some end markets primarily industrial will remain very tight especially through the first half of the year.
And we also assume that foreign exchange rates will stay at today's level. So, that said we expect to achieve revenues of $10.0 billion to $10.3 billion in 2009, which would be a 2% to 5% decline from 2008 and takes into account the significant headwinds from FX.
This performance would lead to an organic growth roughly in the range of about -2% to +2%. At this point, we are assuming that organic growth will be approximately flat and thus reflected in the midpoint of our guidance.
If the economy gets stronger in the second half, we would expect to come in at the higher end of the range with low single-digit organic growth, if it gets worse we would expect to be in the negative low single-digit. We expect our adjusted EPS to be in the range of $3.00 to $3.30 for 2009 including the effect of the $0.03 accounting change for convertible debt.
This would lead to a growth range of minus –4% to +5% over 2008, on an apples-to-apples basis. I would like to note here that we are assuming about $0.15 of adjusted EPS roughly 5% headwind in 2009 from unfavorable FX.
So, without the FX headwind, we would be looking at positive adjusted EPS growth of between +1% and +10% for 2009. Now, on an ongoing basis, we continue to carefully monitor the market dynamics and how our businesses are being affected.
We have plans in place that will allow us to respond depending on how the year unfolds. If the economy gets worse, we will implement our plans to further reduce cost, if it gets better, we may actually ramp up some investments.
Either way the actions we will take will support our growth in the long-term something that’s very important to us and position us to emerge from this period, an even stronger industry leader. Now, I would like to turn the call to our CFO, Pete Wilver for a more in-depth financial update.
Pete?
Peter M. Wilver
Thanks Marijn. Good morning everyone.
As Marijn said we had a strong quarter in Q4, the 16% growth in our adjusted earnings per share to $0.88 compared with $0.76 last year. Full year adjusted EPS was $3.16, up 19% versus $2.65 last year and up a $0.01 from the high end of the original guidance of $3.05 to $3.15 that we gave at the beginning of 2008.
A very good result given all the turmoil, we saw in the world economy towards the latter part of the year. GAAP earnings per share in Q4 were $0.68 up from $0.54 in the prior year's quarter primarily as a result of our improved operating performance.
Our press release contains a detailed reconciliation between GAAP and adjusted EPS. Revenues in Q4 increased 1% year-over-year to $2.65 billion.
Organic revenue growth in the quarter was 4% excluding unfavorable foreign currency translation of negative 4% and acquisitions net of divestitures of positive 1%. Organic growth in the quarter was favorably impacted by two days as a result of our fiscal calendar.
Full year revenues were $10.50 billion for 8% growth over our 2007 revenues at $9.75 billion. Organic revenue growth for the full year was a solid 5% after excluding 1% favorable foreign currency translation and acquisitions net of divestitures of 2%.
For the full year, we had one more day than in 2007 as a result of the leap year. Bookings were below revenues in the quarter by about 2% and were flat with revenues for the full year.
In the Analytical Technologies segment Q4 revenue declined 1% on a reported basis and grew 3% organically. In the quarter, we saw softer demand from industrial markets than in previous quarters.
New products continue to be a growth driver specifically in our scientific instruments and life science research product lines. For the full year, Analytical Technologies grew 7% on a reported basis and 4% organically.
In the Laboratory Products and Services segment, Q4 revenues increased 3% on a reported basis and 5% organically. During the quarter, we saw a strong growth in our research catalog, laboratory workstations, and biopharma logistics services businesses.
For the full year, revenues in Laboratory Products and Services grew 9% on a reported basis and 6% organically. By geography, we saw a growth in all our regions except the rest of the world, which contracted in the low single digits.
North America and Europe rebounded slightly from Q3 to grow at around the company average for the quarter. Asia growth slowed from previous quarters to slightly below the company average, but China growth remained strong offset by a decline in Japan.
For the full year, North America and Europe grew below the company average, Asia-Pacific grew in the mid teens, and the rest of the world in the low 20s. Q4 adjusted operating income increased 9% year-over-year to 492 million.
Adjusted operating margin was 18.6%, up a 140 basis points from 17.2% in the year ago quarter. The strong margin expansion was driven by pull through on our incremental organic revenues, including the favorable impact of our annual and mid-year pricing actions along with strict cost control and strong contribution from our global sourcing efforts.
For the full year, adjusted operating margin expanded a 100 basis points to 17.8% as compared to 16.8% in the prior year. Analytical Technologies Q4 adjusted operating income increased by 6% year-over-year and adjusted operating margin was 22.4% up a 150 basis points versus 20.9% last year, primarily as a result of increased prices and substantial productivity improvements including global sourcing actions.
For the full year, Analytical Technologies adjusted operating margin expanded a 170 basis points to 21.4%. Laboratory Products and Services Q4 adjusted operating income increased by 12% and adjusted operating margin was 14.7% up a 110 basis points versus 13.6% in the 2007 quarter.
In Q4, our mid-year pricing actions almost fully offset inflation and we saw solid gains from our incremental productivity and cost actions. For the full year, Laboratory Products and Services adjusted operating margin expanded 40 basis points to 14.1%.
Total company adjusted gross margin was 41.5% in Q4 up 60 basis points from 40.9% in the year ago quarter, primarily as a result of volume leverage including increased prices and the impact of our sourcing and productivity initiatives. Inflationary pressure on our raw material cost continued in Q4 at about the same rate as Q3, although we did see lower inflation in raw resin.
Also the rate of increase in our fuel and freight cost eased significantly during the quarter. For the full year, adjusted gross margin was 41.3% up 50 basis points from 40.8% in the prior year.
Adjusted SG&A was 20.6% of revenue in Q4 down 70 basis points from 21.3% in the year ago quarter primarily as a result of volume leverage and cost controls partially offset by higher stock compensation expense. For the full year adjusted SG&A percent of revenue improved 40 basis points to 21.1%.
R&D expense was 2.3% of revenue in Q4 flat with last year. For the full year R&D expense was also flat at 2.4%.
Moving to below the line items. Q4 adjusted net interest expense improved 6 million year-over-year to $17 million primarily as a result of a reduction in our net debt.
This was partially offset by a much less favorable interest rate environment. Other income was down $2 million from the prior year, which resulted primarily from a $1 million write-down of our investments and currency translation losses on foreign entity cash.
Our adjusted tax rate for the full year was 23%, down slightly from our 23.3% full year estimate at the end of Q3, which resulted in a comparatively lower Q4 adjusted tax rate of 20.9%. The 2008 Q4 rate is down over 1.6% from the prior year primarily as a result of the tax planning that we implemented during the second half of 2007 and throughout 2008.
The decrease of 0.3% from our previous full year forecast was driven primarily by an increase in our ability to utilize foreign tax credits and a shift in our international income to lower tax rate jurisdictions. Average diluted shares were $427 million for the quarter, down $14 million from $441 million last year.
The lower share count reflects the benefit of our share buyback programs in 2007 and 2008 as well as lower convertible dilution resulting from the lower stock price. During the quarter, we spent $85 million to buyback $2.5 million shares, leaving $415 million remaining under our current $500 million authorization.
For the full year, average diluted shares were $435 million, down $9 million from $444 million in 2007. In terms of the balance sheet, full year cash flow from operations from continuing operations was $1.42 billion, and after deducting net capital expenditures of $249 million, free cash flow from continuing operations was $1.17 billion.
In the quarter, we spent $36 million on facility purchases as part of our footprint optimization efforts. We ended the year with $1.29 billion in cash and investments up 38 million from Q3 as our free cash flow was partially offset by cash used for acquisitions, debt repayments, and share repurchases.
Our total debt was $2.06 billion, down a 124 million from Q3 primarily due to repayment of our 7 5/8 senior notes, which we do on October 30. Also Standard & Poor's announced on January 29, that it had raised its corporate credit and senior unsecured debt ratings on Thermo Fisher to A- from BBB+, with a positive outlook.
This is a notable confirmation of our strong balance sheet and liquidity position, in spite of the very uncertain economic environment. So, overall we are very comfortable with our liquidity position and ability to meet our financing needs for the foreseeable future.
Moving on to working capital, we had good performance in the quarter. Accounts receivable days sales outstanding was 50 days down four days from Q3 and flat with the prior year and inventory days of supply was 68 days down six days from Q3 and also flat with prior year.
So, finally moving on to our future guidance. As Marijn said, we expect a difficult economic climate in 2009 for the capital equipment portion of our revenue, especially during the first half of the year, due to constrained capital budgets.
However, our consumables and service businesses, which represent about two-thirds of our revenue should fair better in this environment as they are tied to activity rather than investment decisions. As a result, we are initiating a 2009 revenue guidance range of $10.0 to $10.3 billion, which represents a 2% to 5% decline, as compared to our 2008 reported revenues of $10.5 billion.
This guidance assumes about 0.5% growth from past acquisitions and divestitures and no future acquisitions or divestitures. It also assumes present foreign currency exchange rates, which would negatively impact our revenue growth by about 4%.
As you are probably aware foreign currency exchange rates have been extremely volatile in past few months and consistent with past practice we haven’t attempted to forecast what will happen in the future. In terms of adjusted earnings per share, we are initiating a 2009 guidance range of $3 to $3.30, which factors in a negative $0.15 per share or 5% impact from unfavorable foreign currency translation and a $0.03 reduction to reflect the impact of the new convertible debt accounting rule that will take effect in the first quarter.
This guidance represents the growth range of negative 4% to positive 5% as compared to 2008 after applying a $0.03 reduction to 2008 for the new convertible debt accounting rule. And after adjusting for the 5% FX headwind on earnings, we are guiding to growth of positive 1% to positive 10%.
Our adjusted EPS guidance assumes that we will complete the remaining $415 million of our current share buyback authorization during 2009 and that our tax rate will be in the range of 23% it does not include any other significant assumptions with regard to future acquisitions, share buybacks or other uses of capital. In response to our revenue outlook we implemented strict discretionary cost controls and some selective reductions in force in the fourth quarter, which enabled us to deliver strong financial results in year-over-year margin expansion in the quarter.
We are planning to implement additional cost actions in 2009 where necessary to align our cost structure to a lower revenue base. These actions are included in our current guidance.
We have also developed additional contingency actions that we will implement if required as we continue to monitor our revenue outlook in the coming months. That being said we’ll generally take a longer-term view and avoid taking actions that we believe will damage the company’s future growth prospects.
With that I’ll turn the call over to the operator for Q&A.
Kenneth Apicerno
So, operator we’ll take questions now.
Operator
(Operator Instructions). Our first question comes from Derik De Bruin with UBS.
Go ahead please.
Derik De Bruin – UBS
Thank you. So, a couple of questions.
When you kind of look at the organic revenue growth expectations that you got for like the consumable businesses, the instrument businesses, I mean if we, roughly 70% of your business being consumables, Fisher historically grew between 4 and 6% I would assume that your expectations for the consumable businesses is probably at the 4% range for this year?
Marijn E. Dekkers
Derik De Bruin – UBS
And then I guess for along the same lines, for the stuff that's really kind of like heavy industrial equipment and the ones that are going into, much more economically exposed customers like, are you thinking down 5%, down 10% range?
Marijn E. Dekkers
Yeah. I think so again, the difference between the economic environment today and the economic environment in '01, '02, '03 is that we now also have just much less credit available, the overall banking crisis, we didn't have at that time, it was just a good healthy economic recession.
And so, I think things are a little bit more severe then they were back then.
Derik De Bruin – UBS
Okay. And then just one final question.
So, I guess what's your assumptions for operating margins when you kind of look at 2009, are you thinking margin in flattish basically, is that's kind of what's implied in the guidance range?
Marijn E. Dekkers
No, I mean, I think we still hope and we would be hitting the mid-point of our guidance say 0% organic growth, we still hope to be able to deliver some EBITDA margin expansion on that. And that's reflected in the guidance and translation to the EPS mid-point.
Derik De Bruin – UBS
Okay. So, then the lower range on the EPS is more to do with the potential volume pull through from the organic revenue growth being down or is it below the line?
Marijn E. Dekkers
Yeah, exactly. So, I mean, basically say $3 to $3.30 and you can roughly put a bracket on that, of -2% to +2% organic growth.
Derik De Bruin – UBS
Okay. Thanks a lot.
I'll get in the queue.
Marijn E. Dekkers
Okay.
Operator
Thank you. Our next question is from Ross Muken with Deutsche Bank.
Go ahead please.
Ross Muken – Deutsche Bank
Good morning. So, as you sort of look across your end markets, I mean it's definitely a more interesting time than we have seen in quite a long while, is there any sort of specific areas that you are closely monitoring, I mean obviously industrials, I think is well understood to be soft.
Aside from that in the traditional life science markets where there is potential for either a significant delta versus where we are today, is there any sort of specific one that you are most concerned about or monitoring most closely, or do you think across sort of mostly life science markets its still relatively kind of somewhat predictable comparative to what we are seeing on the industrial side?
Marijn E. Dekkers
Well, I think that, good morning. I think that we've seen a really rough few months obviously with a lot of people being very, very, very nervous and with no questionable access to capital.
And of course everybody slams on the break particularly from a capital budget point of view. Anybody who can postpone buying inexpensive instruments whether it’s in a hospital or in large pharma or anybody who has the stock price that came down 40% on average is going to be careful in how they are going to spend money particularly if the bankers tell them that they can't borrow anything.
So, that’s what we have gone through, and I think actually that part of it is already getting a little bit better, money seems to start flowing a little bit easier again and that doesn’t mean people are going to throw caution in the wind, but I do expect that to get better, in the end, you think about hospitals for instance. People are going to get sick, hospitals curtailing their spending on capital equipment is five maybe for a few months, but that’s not a long-term option.
And therefore, I think that that overtime it will get better, and we’re hoping in the second half of the year the capital budget constraints will become less severe. I think the, a few things that I really can't explain is why CROs are so weak, because I think in the end pharma is not that cyclical from an economy and therefore CRO shouldn’t be that cyclical from an economy point of view.
So, I think there is some artificiality in the weakness of CROs right now, that I think will turn around relatively quickly, because in the end CROs are a great way to drive productivity for large pharmas. So, I think that market will recover very soon.
Ross Muken – Deutsche Bank
Okay. And as we think about the strategy of when you put these two businesses together in terms of Thermo and Fisher clearly, I talk about the one stop shop and the ability to capitalize longer-term on a consolidation of suppliers amongst your customer base.
As they move this sort of more sophisticated [blotting] pads to what degree do you think kind of the economic strains that we’re seeing right now could almost perversely sort of benefit you in that, people look down their supplier list and say maybe we don’t need to be purchasing from 20 separate entities and specially with EPS under pressure across the board, every basis point of savings counts to what degree do you to think actually this sort of helps, kind of push your cost that I know has been kind of a top line synergy that's been talked about for sometime since the deal was accommodated?
Marijn E. Dekkers
Yeah. So, I think it's a very good point that you are making, I mean we have been able to drive these synergies obviously otherwise, we wouldn’t be doing so well with large pharma in this environment.
So, it has been working, but I think this just puts more fuel on the fire again in terms of big pharmas willingness to change the way they are doing business. And that is a very, very big struggle for a lot of CEOs who are running big pharma companies.
Actually, I am the CEO myself it is a lot easier in this environment to drive change in a company than when everything is going nice and dandy. Because all you have to say is well the alternative is that, we may have to cut cost by laying off some people and very quickly people volunteer to reduce expenses or try to drive cost efficiency because the alternative is much less desirable through the whole organization and I think the same is going on in big pharma right now.
If there is a choice between doing another 500 people layoff at big pharma or consolidating that by [bet] purchases with Thermo Fisher. I think it's a pretty simple equation.
Ross Muken – Deutsche Bank
Great. I appreciate the color Marijn.
Thank you again.
Marijn E. Dekkers
Thank you.
Operator
Thank you. Our next question is from Tycho Peterson with JPMorgan.
Go ahead please.
Sung Ji Nam – JPMorgan
Hi. This is Sung Ji sitting in for Tycho.
Thanks for taking the questions. Kind of in terms of your cost structure for 2009, you talked about adjusting it is necessary, could you give us more color as to what some of the specific levers are and particularly how that could impact R&D spending?
Marijn E. Dekkers
Yeah. We really don’t think it will affect R&D spending.
I mean as both Pete and I said we are very focused on the long-term, R&D we don’t see as a discretionary expense, but as a very key component of our technology leadership. We are always cautious and very prudent with how much we spend and spending it on the right project, and we have a very disciplined mechanism for that in the company.
But this is just not an area where we would go. There are still a lot of discretionary that's, in every company lot of discretionary spending going on, where at some point you can say well if the customer base is not going to be spending as much do we really now have to spend ourselves all this money, and some areas that qualify for that are exercising the aggressiveness with which you implement IT improvements, very important to have good IT systems to drive an efficient business model, but its also very expensive, we have been investing a lot in the area, we continue to grow our budget in that area, but the pace at which you do that is discretionary.
So, depending on how the year unfolds, those would be areas where you'd say, maybe we will delay certain projects for half the year to make sure that the economy is on more solid footing, before we spend this extra money.
Sung Ji Nam – JPMorgan
Okay, great. And as for your, would you provide more color on your FX hedging strategies, and if there is any strategies that could potentially offset some of the headwinds this year on both the top and the bottom lines?
Peter M. Wilver
Yeah. In general, in the past we haven't hedged our foreign exchange exposure and we are not assuming that we are going to do that in 2009 either we.
Basically, our foreign exchange gains and losses on the top line fall through to the bottom line and about the average, which means we are basically naturally hedged in terms of our cost structure. We could put, put hedges in place, but in the end that's a bet that the FX rates are going to go down or up.
So, we are basically allowing it to flow through as it happens, its the hedging is really just the short-term strategy.
Sung Ji Nam – JPMorgan
Great. Thank you.
Marijn E. Dekkers
You're welcome.
Operator
Thank you. Our next question is from Quintin Lai with Baird.
Go ahead please.
Quintin Lai – Robert W Baird & Co
Hi, good morning.
Marijn E. Dekkers
Good morning, Quintin.
Quintin Lai – Robert W Baird & Co
Just first looking at your guidance, and in particular are you making any assumptions for the stimulus package in the potential passage and if not what's your view on any potential '09 impact, if passed?
Marijn E. Dekkers
Well as I said in my comments it's very hard to know exactly what's going to happen. First of all, the decisions haven’t been made, but I do believe that we have not included this in our guidance, it would help us to get to the higher ends of our guidance obviously when this would really roll through.
But anytime, anybody makes money available for new laboratories to be built is a very good thing for us and that when we are able to get in on the bottom floor like that, from all the way from the side of laboratory we usually walk away with a lot of the money that’s available. So it’s positive, but it's hard to quantify.
Quintin Lai – Robert W Baird & Co
Thank you for that. And then with respect to kind of the overall market, the sector for you.
With the speed at which, the end markets are changing and that volatility there. What’s your view on you and your competitors going forward, do you think that people, companies will kind of stick to their netting or do you think that there is still opportunity for sector consolidation from the suppliers?
Marijn E. Dekkers
Well Quintin, when I joined this industry nine years ago, I was amazed by how fragmented it is and I still in, in spite of some of the consolidations that have been happening that we’ve been driving and some other companies have been driving it’s still a very fragmented industry. And it goes back a lot to how the industry develops, a lot of the inventions are being done at universities, small companies generate from these universities.
If the companies keep going, but in a more global environment and a more economically tough environment, I think the customers willingness to just by, from all of these different suppliers the new is gadget is diminishing. And so the customer is moving towards more consolidation in the purchasing and as a result the industry has to move along with it, but this industry with a few exceptions including ourselves has not been very proactive driving it.
And, but its just a matter of time.
Quintin Lai – Robert W Baird & Co
So, do you think that, but I guess my question more is that with the end markets being as so uncertain as they are, do you think that that kind of puts a damper on consolidation in the near term or do you think that that really doesn't matter and people can kind of see to that for future deals?
Marijn E. Dekkers
No, I think that, it depends on the motivation of the different companies, whether or not they, they would be sellers right now. And some people will say well, at this low of stock price why would I sell, some others could say well this is just as good a time as any other to become part of the stronger combined entity and that’s a better option for our shareholders.
So, it's hard to generalize you get different reactions from different people.
Quintin Lai – Robert W Baird & Co
Thank you. Thank you.
Operator
Thank you. Our next question is from Tony Butler with Barclays Capital.
Go ahead please.
Anthony Butler – Barclays Capital
Thanks very much. Good morning.
Could you rank order for us given statements around completing the buyback, but rank order for us for cash uses in 2009. And second to that Pete do you have to pay down any of your existing debt in 2009 or would that be an option you would choose to do.
And then finally is your CapEx for ’09 going to change materially from that of ’08? Thanks.
Marijn E. Dekkers
I will take the first question.
Peter M. Wilver
Yeah, go ahead.
Marijn E. Dekkers
So, in terms of priority for the cash on the balance sheet I mean, Tony we have always I think been driving a prudent balance between doing smart acquisitions and using the cash for that and buybacks over the years and that's what we will continue to do. So, the good news is we have very, very strong cash flow, large cash flow given the size of our industry.
And therefore, we think we will come out again with a balance of spending some of the money on acquisitions and some of it on buybacks.
Peter M. Wilver
So, in terms of the, your other questions, we don’t have any debt pay downs required so nothing is coming due in 2009. And as far as whether I would choose it, I would just, I would have to say right now no, just because of, the uncertainty in the debt markets.
I would have to see that, that loosening up a little bit before we would potentially choose to do something like that and we would have to be in that present value positive equation for us to do it. And then in terms of CapEx, it's about the same in 2009 as 2008 around $250 million.
Anthony Butler – Barclays Capital
Thanks a lot.
Peter M. Wilver
Okay.
Operator
Thank you. Our next question comes from Isaac Ro with Leerink Swann.
Go ahead please.
Isaac Ro
Hi. Thanks for taking the questions.
First off is sort of a big picture question on NIH funding. Just, hearing a wide range of scenarios as to what the budget increase might look like, they will sound pretty good and I am wondering if you guys have an opinion as to what you think budget increase might look like based on what you've heard and then, secondly when you look at that number, how do you think about the contribution of those dollars to products and services such as those that you sell versus maybe things that are more infrastructure related by jobs in the lab proposed or some things of that sort.
I kind of wondered if you think it maybe $0.60 on the dollar from NIH might go directly into products or if you had an opinion there?
Leerink Swann
Hi. Thanks for taking the questions.
First off is sort of a big picture question on NIH funding. Just, hearing a wide range of scenarios as to what the budget increase might look like, they will sound pretty good and I am wondering if you guys have an opinion as to what you think budget increase might look like based on what you've heard and then, secondly when you look at that number, how do you think about the contribution of those dollars to products and services such as those that you sell versus maybe things that are more infrastructure related by jobs in the lab proposed or some things of that sort.
I kind of wondered if you think it maybe $0.60 on the dollar from NIH might go directly into products or if you had an opinion there?
Marijn E. Dekkers
Yeah. Well we like it both, more jobs in the end is more consumables for us as well.
So, when people build infrastructure, yes they need equipment and instruments, and goods and centrifuges, but if then they don’t have enough money, if you put a lot of people with white coats in the labs and they won't consume. So, we really actually don't care whether it's jobs or infrastructure because we will benefit both ways.
So, that's, that's one comment, I think, NIH has been very, very flat since 2003 after wonderful ramp up in the Clinton administration. And I think it's good to see its basically going back up, but if nothing else to, do some of the nut keeping up with inflation that we have seen on the NIH budget.
And, but on the other hand we have some excellent years of growth with a flat NIH budget. Okay, so as a company it's not like we are super dependent on NIH being flat or going up, but we have such a diverse customer base that higher NIH is good it will offset some of the issues that philanthropic donations will be having right now, which often offset some of the flatness in NIH in the past.
Philanthropy, will probably be going down, but it will be probably offset by higher NIH budget, net that's probably a positive for us in terms of spending available, but we shouldn't over interpret these things.
Isaac Ro
Right. Okay.
And then secondly, just kind of interested on your comments relative to the CROs, are those based on what you're seeing here, right here at your labs or maybe among your pharma customer conversations or did both?
Leerink Swann
Right. Okay.
And then secondly, just kind of interested on your comments relative to the CROs, are those based on what you're seeing here, right here at your labs or maybe among your pharma customer conversations or did both?
Marijn E. Dekkers
Yeah, I have always believed that CROs is a great way for pharma to drive efficiency, by basically eliminating their own capability in certain areas and leaving it to a more professional organization to do relatively routine work, at a lower cost and more efficiency, and that’s not going away. If pharma is really looking for efficiency, they’re going to need the CROs to help them drive that.
So, this pullback in CRO activity is, I think going to be temporary. And what is that based on, really just common sense and of course my interactions with the industry.
Isaac Ro – Leerink Swann
Right. And then lastly you saw on your consumable side for lab products and services.
Do you think you did some market share in the fourth quarter and does your business plan call for any share gains in 2009?
Marijn E. Dekkers
No, we always try to take market share of course. One of the things that has happened in that part of the industry is that we’ve seen some very good price increases, over the past half year.
So, that was a mid year, mid-year, August price increase as a results of the much lower or much higher input costs for raw materials than there was the regular annual price increase. So, the consumables have been helped with, the revenue numbers have been helped somewhat with price increases over the last six months.
Isaac Ro – Leerink Swann
Thanks very much.
Marijn E. Dekkers
Okay. Thank you.
Operator
Thank you. Our next question is from Jon Wood with Banc of America/Merrill Lynch.
Go ahead please.
Jon Wood – Banc of America/Merrill Lynch
Okay. Thanks.
Pete, can you give some parameters around operating cash flow in ’09?
Peter M. Wilver
Jon, you would have disappointed me if you didn't ask question.
Jon Wood - Banc of America/Merrill Lynch
Can you expand it, it doesn’t count?
Peter M. Wilver
Yeah, I think we’re looking at a flat cash flow year-over-year, so about 1.2 billion, just the two big pluses and minus are, obviously in this environment we are going to be doing a little bit more spending on restructuring actions, and so some incremental cash expended there, and then a little bit better performance on the working capital side to offset that netting out to about flat.
Jon Wood - Banc of America/Merrill Lynch
Okay, great. I know you guys don’t typically do this, but can you just give us some parameters around the first quarter given all of the uncertainty out there I mean just basically would you expect EPS to be down in the first quarter year-over-year?
Marijn E. Dekkers
Well, you are right we typically don’t do this. I think the one thing I would say is that Q1 is probably going to be the toughest quarter of the year.
Okay, I mean that’s not a big surprise and first of all because the comparisons are still relatively hard because, a year ago we weren't looking at this situation, and secondly I think we are right now right smack in the middle of the result of what we have seen in the last five months. This is a super conservative time for everybody, the beginning of the year, nobody knows what it will look like, and people are cautious, we are cautious ourselves in how we spend our money.
So, when there is more visibility, and as I said also I mean the availability of capital loosening up I think that will make people feel better gradually throughout the year. And that will fuel some more confidence and then I think more activity in the economy.
Peter M. Wilver
Just in terms of our fiscal calendar as well we lose a day in Q1, a day in Q2 and then we make a backup in Q4. So, a net negative one day for the full year, so the first half is getting impacted by negative two days year-over-year.
Jon Wood - Banc of America/Merrill Lynch
Okay, and just.
Marijn E. Dekkers
But, I think Jon the important takeaway here is that, I know you are interested in Q1, but we give guidance for the full year and we are very comfortable with the range that we have given for the full year and that's really what I think people should be focused on.
Jon Wood - Banc of America/Merrill Lynch
Sure. And just a last point Pete in your estimation what type of financing spreads can Thermo access right now in the current environment.
I mean do you expect you will get any benefit from the A rating there or are spreads still unreasonable?
Peter M. Wilver
Well, I would not really want to be borrowing money right now I mean the numbers have just been popping all over place they change week-to-week by close to a 100 basis points some weeks. So, I certainly think the A- rating will help us, Moody's still sitting at Baa2 with us and, hopefully they reevaluate that position and get more with the fact with Fitch is at BBB+ right now.
So, I think its certainly a positive and we will have to see it really comes down to when we go to borrow money what the spread it going to be but, it's ranged anywhere from 500 basis points up to the mid sixes in the last couple of months depending on the day.
Marijn E. Dekkers
Okay.
Peter M. Wilver
We lose the call.
Marijn E. Dekkers
Hello. Operator, next question.
Operator
Thank you.
Marijn E. Dekkers
Okay.
Peter M. Wilver
Okay.
Operator
Our next question is from Peter Lawson with Thomas Weisel. Go ahead please.
Peter Lawson – Thomas Weisel Partners
Peter, I wonder if you could give some breakout of how much it improves, what contributed to the 140 basis points improvement?
Peter M. Wilver
Yeah. In terms of the 140 basis point improvement basically there is a couple of key drivers to that one is obviously pricing, and the pull through on that, we do our annual price role at the beginning of the year and then the mid-year pricing actions, the ones that really took hold in August and October kicked in Q4.
As I mentioned we also had pretty strict cost controls in Q4 just because we were expecting a little bit softer revenue outlook so we've really clamped down on discretionary spending in Q4. And then we really ramped up on our global sourcing actions to try to offset some of the direct material inflation.
So, those are really the three key drivers obviously we every quarter we’re doing practical process improvements and other productivity actions, but those are really the three that were the difference.
Peter Lawson – Thomas Weisel Partners
And what was the growth you saw of Asia and are you still investing in Asia?
Peter M. Wilver
Yeah. We’re certainly still investing in Asia in terms of organic revenue growth that was slightly below the company average in the quarter and then the mid teens for the full year.
Peter Lawson – Thomas Weisel Partners
And then I was just wondering if you could talk to some of the other levels you see for cost cutting in 2009 are there any salary freezers in place or higher increases in place at the moment?
Marijn E. Dekkers
No, no salary freezes, but we’re cautious backfilling positions that come open, at the moment. I mean not, cautious means we don’t just blankly replace every opening instantaneously with another person rather hire from the outside.
So, we are careful, but we are not going crazy here in terms of staff reductions, we don’t feel at this point that we have to. And the people who work here are here for a reason, which is contributing to the future prosperity of the company.
So, we’ve always run a relatively tight shift and we try to maintain as much continuity as we possibly can. We are fortunate given the mix of our products and the end markets we serve that we can take that approach in contrary to obviously some other companies at the moment outside of our space.
Peter Lawson – Thomas Weisel Partners
Okay. Thank you so much.
Marijn E. Dekkers
Operator, we’re going to take just one more.
Operator
Thank you. Our final question is from Doug Schenkel with Cowen & Company.
Go ahead please.
Doug Schenkel – Cowen & Company
Hi good morning and thanks for taking the questions.
Marijn E. Dekkers
Good morning.
Doug Schenkel - Cowen & Company
Clearly, it’s an incredibly difficult environment and despite that you've generated 4% organic growth in the quarter I think that was even a little bit better than what you did in Q3 arguably against the tougher comp. This is despite the fact that as you acknowledge Q4 sales to industrials were already under pressure.
Its sounds like you're picking up share in pharma, I don’t want to sound it all naïve to what’s going on in the broader environment, but I’m curious given how well you did in Q4, whether there was something very specific that you saw deteriorate right at the end of the quarter or may be in early January that gave you increased reason for pass heading into the year?
Marijn E. Dekkers
No, I think it’s a good question. No, it’s not just revenue it’s also orders, we saw probably 1.5% to 2% difference in terms of our order organic growth versus revenue.
So, the backlog came down by a few percent. And we also have, I don't want to overplay it, but we had two extra days in the quarter, compared to the 2007 fourth quarter, which probably at 1.5% or so.
Now, you never know because people have a budget they are going to spend it anyway whether they have two more or two less days. So, it’s we shouldn't overanalyze this, but I think the 4% was very good, but I wouldn’t go in and say, yeah we are going to do 4% for 2009 I think we have enough reason to believe right now starting the New Year that that things are tougher than 4% organic growth for us, particularly, in the beginning of the year.
Doug Schenkel - Cowen & Company
Okay, that's helpful. And then instrument sales for regulated proposes, have they hold up a little bit better than placements for non-regulated proposes and has this provided some cushion in certain end markets specifically industrial, chemical where things are clearly better or weak?
Marijn E. Dekkers
Yeah. I mean that's the beauty of pine of our customer base, it's a regulated customer base quality control, food.
Food quality is doing very well particularly in China, as you know, where a lot of infrastructure is being put in place in laboratories to do better monitoring of the quality of food products that are being exported. And just in general anything that's related to environmental tends to hold up quite well, safety precaution tends to hold up well.
Even if it's an industrial environment, because people cannot cut quarters on environmental and safety concerns.
Doug Schenkel – Cowen & Company
And any chance you would be willing to share what percentage of instruments sold to the industrial chemical end market are for safety purposes or regulated purposes?
Marijn E. Dekkers
Well, we don't even know.
Doug Schenkel – Cowen & Company
Okay.
Marijn E. Dekkers
Quite honestly. We have so many customers, and we don't keep particular track of that.
Doug Schenkel – Cowen & Company
Okay. And last question, I apologies if I missed that I think you guys typically do get an annual 1% to 2% price increase, that you implement in early January.
If I am correct, any challenges with that given the environment?
Marijn E. Dekkers
No, we've implemented it.
Doug Schenkel – Cowen & Company
Okay.
Marijn E. Dekkers
Again, on the consumable side usually these things are very much part of regular life and people understands why this needs to be done, just to keep up with inflation. On the larger ticket items, we have a list price, but there is often, a negotiation there, anyway its like when you buy a car versus toothpaste.
You're not negotiating the price of toothpaste, but you are as a consumer negotiates the price of car now we see the same in our consumable versus instruments business.
Doug Schenkel – Cowen & Company
Great. Thanks a lot for taking the questions.
Marijn E. Dekkers
Okay. Thank you.
So, we have to wrap it up, thank you very much. Just to close, I'm very confident that our continued operating discipline and our strong balance sheet and our gross investments will help us to emerge from this recession as an even stronger industry leader.
So, I want to thank you for listening today, and thank you for your continued support of Thermo Fisher Scientific. Thank you.
Operator
Ladies and gentlemen, thank you for your participation. That concludes the conference.
You may disconnect and have a wonderful day.