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Executives

Quintin J. Lai - Vice President of Investor Relations

Rakesh Sachdev - Chief Executive Officer, President and Director

Jan A. Bertsch - Chief Financial Officer, Executive Vice President and Treasurer

Eric M. Green - President of Research and Executive Vice President

Gilles A. Cottier - President

Franklin D. Wicks - Executive Vice President and President of Applied Markets Business Unit

Jason Apter - Chief of Staff

Analysts

Steve Willoughby - Cleveland Research Company

Timothy C. Evans - Wells Fargo Securities, LLC, Research Division

Daniel L. Leonard - Leerink Swann LLC, Research Division

Rafael Tejada - BofA Merrill Lynch, Research Division

Joel Kaufman - Goldman Sachs Group Inc., Research Division

Tracy Marshbanks - First Analysis Securities Corporation, Research Division

Daniel Arias - UBS Investment Bank, Research Division

Amit Bhalla - Citigroup Inc, Research Division

Sigma-Aldrich Corporation (SIAL) Annual Business Review Conference March 21, 2013 9:30 AM ET

Quintin J. Lai

Good morning. My name is Quintin Lai, Vice President of Investor Relations and Strategy. And on behalf of everyone here at Sigma-Aldrich, we welcome everyone participating on today's webcast, as well as participating here in St. Louis.

A couple of housekeeping items before we start. For those of you in St. Louis, and if you have any travel arrangements, especially to the airport, and you haven't already talked to Debbie Fate [ph], she is in the back raising her hand, and so just contact her, please, at the break.

Other housekeeping items. This auditorium is adjacent to our R&D center. There are exits here to the -- to my right and to the -- to my left and out to the back. And if you hear any issues, please follow directions on the loudspeaker or follow a member of the Sigma-Aldrich employee team.

Before beginning this business review, I want to remind all of you that today's comments include forward-looking statements about future activities and our expectations for sales, earnings, cash flow and other possible future results. While we believe these expectations are based on reasonable assumptions, actual results may differ materially due to any number of factors, including the risk factors listed in our annual report on Form 10-K for the year ended December 31, 2012, and the cautionary statement included in this presentation. This presentation is, by the way, available on our webcast -- on our website, www.sigmaaldrich.com.

We have no plans to update these forward-looking statements after this presentation. We're also providing information on non-GAAP financial measures. Management uses these measures in its internal analysis of results and believes this information may be informative to investors as well. For a reconciliation, please see the appendix in the slide presentation.

Today, we have a big schedule, with many members of our executive management team. We will have a break at around 10:30 in the morning Central, where we'll break for 20 minutes, and then we'll resume the presentation and the webcast after that. We're targeting a Q&A at about 11:40. And then after the Q&A, for those of you who can join us, we would welcome -- most welcome you to lunch adjacent to this room.

So to kick things off, let me introduce our President and Chief Executive Officer, Rakesh Sachdev.

Rakesh Sachdev

Thanks, Quintin, and good morning. Everybody hear me? Again, for those who I've not had the pleasure of meeting, I'm Rakesh Sachdev. I'm the CEO of the company. And I also want to extend my very warm welcome to all of you taking the time to come and visit us in St. Louis on this very chilly morning, and those who are on the phone. So welcome.

We have a very exciting story that we want to share with you this morning, and we have a lot to share with you. And I can tell you that, as I stand here today in front of you, since the time I became the CEO, I've never felt more confident about the future outlook of this company and where we're taking it. So there are some great things happening. We know there are headwinds in the industry. We've talked a lot about that. But we'll also tell you about our story of what we are doing to positioning this company for growth. Because it's all about growth, that's where we're taking this company.

I think it's good to just recount a little bit about the mission and the vision that has guided this company since it was founded 78 years ago. Clearly, our mission is to enable science, to improve the quality of mankind and improve the quality of life. And that has guided us right throughout the history of this company, and, frankly, it's going to guide us as we move forward. That has made us one of the key premier trusted providers not just to research labs, which is what the foundation of this company was, but also in commercial markets where we are taking our business, and now in the applied markets, that we want to talk quite a bit about this morning.

A little bit about the history because I think it's important to see how the company has done, what the track record has been, before we talk about the future and give you the confidence of where we can take this company.

So the company started 78 years ago. Frankly, there were 2 companies. There was Aldrich, which was chemistry based. There was Sigma here in St. Louis, that was biology based. And it started off simply on -- focused on a few products that researchers wanted. It was again, scientists helping scientists. During this period, we modestly grew. There was -- the whole field of research in several areas was beginning to grow, and we saw an opportunity, an opening, and we started that. As we moved into the late '70s, when we merged the 2 companies together and took it public on NASDAQ, and into the '80s, clearly there was an explosion that was happening. And we were taking a very important part of that, especially with pharma and biopharma, when there was huge amount of discovery effort around drugs. We were broadening our portfolio of products, chemicals, molecules, and we were growing in about -- at about 15% organic. It was a great time. Our Research business was doing well. But we were beginning to sense that, at some point, that research was going to start getting more mature, like most markets do. And during this time, our researchers -- our Research customers were pulling us into the commercial business. A lot of these folks who were developing new products, which were getting commercialized, they were asking us, "Why do you all helping us even in the commercial space?" We saw that as an opportunity, and we started getting into that. So we were more proactive than just having our customers bring us, we started thinking about which fields that we wanted to get into. We made some excellent acquisitions. We knew that, at some point, this was going to go into the whole biology field. We got to $1 billion mark fairly quickly. And then, as we moved forward from the research growth phase, we're going to the phase where we clearly saw growth on commercial markets. That gave birth to our SAFC business, which is our specialty Fine Chemicals. We made an acquisition of the industrial media business. That was our JRH acquisition, which today, is really a platform for tremendous growth for this company.

We acquired some other companies called Tetrionics, which gave us the capability for high-potency compound manufacturing, this was in Wisconsin, again giving us strong double-digit growth now. So we saw that in the early 2000s and made some, I think, very good acquisitions, and our SAFC business took off.

And then as we approached the late 2010, we said we have to start thinking about another platform for growth, and we quietly started growing our business in the applied markets. We didn't make a big splash. And as you will hear from Frank Wicks, who is now running our Applied business, that business is already about 20% of our [indiscernible]. And so what we announced late last year is to create an Applied business group, and that becomes a third platform for us to build our growth. And we'll talk a lot about these platforms as we talk about where we're going from 2013 and beyond.

We've been a consistent company that has provided financial performance. Some of you may have seen this USA Today article that came 2 weeks ago. It talks about the Nasdaq-100 companies. In fact, it was -- when I read this, I was a little tickled. This is one of the feel-good slides, by the way.

So it talked about the top 100 NASDAQ companies at the time of the tech bubble in 2000, and how many of the household names that stood in the Nasdaq-100 have pretty much got demolished or don't even exist. And the USA Today article goes on to say that there are a few companies that have outshined on the Nasdaq-100. Another surprise, Apple was #1. They listed us as #2, and Starbucks as #3. So they listed only 3 companies in the article. So it's very, very interesting.

So 600% growth since 2000. I know -- I was talking to some people outside this morning over breakfast who bought our shares in 2000. [indiscernible].

Much of today's discussion is about the future. So I'm not going to have a whole lot to say about the past. But I will say that 2012 was a turning point for us. It was great year. It was another record year for us in terms of sales and profit and cash flow in our 38-year history of being a public company.

We have a great leadership team. You're going to meet and hear from a number of folks this morning. There are a few folks you're not going to hear from, but, hopefully, you'll get a chance to meet them during the breaks. I think we have one of the best leadership teams in the industry.

And in addition to being a high-performance financial company, I can tell you that, as a company, we take our contribution to the community that we live and work in very seriously. And we've been getting a lot of accolades. We are a company that really believes in investing our time and effort and money in helping these communities. We got listed on -- by Bloomberg as one of the 50 most civic-minded companies. In fact, we were the only company in St. Louis, and we were alongside of people like Pepsi and Coke and IBM. We've been also listed by many institutions as one of the top employers. Last year, we got an award in Europe. Newsweek listed us as one of the most green companies.

So I just stress that because I think we bring a balance in this company on -- both focusing on customers and financial performance, but also on the community.

And I would say the last thing, so it was really a turning point, which is why I'm so confident today, is what we have done and the way we are running our business and the way we are moving forward, and by focusing our company into market-focused business units. We've been a very strong product-led company, and we're going to always be a strong product-led company. But during times like this, where we're really trying to identify and work with our customers, having these market-focused business units is really energizing not just our employees, but it's also energizing our customers.

So again, so what you're going to hear a lot about this morning is our plans to move forward in these 3 businesses. Eric Green, who runs our Research business, is going to come and tell you how, even in a business that is seemingly slow, how we're going to grow and eke [ph] our growth more than the market.

You're going to hear from Gilles Cottier, who's been running our Commercial business, some very exciting opportunities that we are working on, some fairly large opportunities that we're working on.

And then the Applied business, which is where -- it's not really a new business, but we have put a new focus and a new lens on it. Frank Wicks, who is running that, will talk about that.

What I would say is all 3 leaders have, in the past, grown different businesses. Eric, when he took on the Asia-Pacific business, in the 5, 6 years that he was on Asia-Pacific, he has tripled that business. Frank Wicks really started the SAFC business. In the 5 years that he ran the SAFC business, he tripled that business. And Gilles Cottier, over the last few years, has been growing his business double digits. So we have the leaders who have been proven in what they have been able to accomplish in this [indiscernible].

I just want to talk a little bit about what we do and the workflows that we deal with, because I think a lot of people think about us as selling chemicals in bottles. We are a solution-based company. So when you look at the important workflows that we work with, with our customers, we are really solving problems into -- in a complete workflow that our customers are working with.

So this is a chemical synthesis workflow, where there are different phases. So for a researcher, there's a planning and preparation phase. And then they typically go through a chemical synthesis and manufacturing of the product. And then once that's -- they are manufactured, the purification and characterization.

Also, there's a commercial phase. So companies that are actually producing products also go through similar phases. And we have critical products and services in every phase of this workflow, whether it's for the researcher or whether it's for the commercial customer. And that's what makes us such a strong partner for our customers.

If you look at another workflow like -- if you look at the life sciences workflow, which is really the Biology workflow, where it starts off with a study of DNA and RNA, and then moving on then, study of proteins and small molecules and then cells, again we are in every phase of the workflow, both on the Research side and even more so on the Commercial side, where we have acquired and developed capabilities of producing the kinds of products that we do in each of those. I'm not going to get into these because I think when our business leaders come and talk about some of these things, they'll give you a much better appreciation of what we do. But the point being that we are in complete workflows and aren't just selling individual components.

This is the Applied workflow, and Frank is going to talk about this. Typically, any Applied are in a testing lab, and this is different than Research. So when you think about the Research business, it's -- there's an investigation that a scientist is doing. When you think about applied markets, it's typically a technician who's doing a test, a repeatable test. And it could been in a clinical diagnostic setting, it could be an industrial setting, environmental lab. And you typically go through phases of preparing a sample, then detecting what you're trying to detect in the sample and then analyzing the information. And again, we are very strong on the sample prep side. We provide a lot of standards. We provide separation columns. And then we are more -- increasingly developing more and more complete test assays and solutions for many of these, and Frank is going to give you some examples of what we are doing and how we're running in those [indiscernible].

Industrial applications. We haven't talked to you a lot about what we do on the industrial side, but we have tremendous exposure to consumer product companies, to specialty chemical companies and agricultural companies. We are selling flavors and fragrances to the flavor and fragrance industry. We are in petrochemicals. We are a big provider of products to contact lens manufacturers. We are in the food processing industry, and Frank is going to talk about this. This business, today, is already about 10% of our company. And we've been growing this with a limited focus. And now, with the new organization, we are -- we have a much larger focus. We are calling on customers, who really we didn't call, who were just buying our products because our product were available in a catalog. With the proactive stance that we're taking, this is going to become another growth engine for us.

So when it comes to all these products and services, and we have a very rich offering, 60% of what we sell, we manufacture. And the other 40%, or most of the other 40% that we don't manufacture, we still have a significant value add. We will typically do some purification. We'll do some quality control. We'll do packaging in the right sizes. And we stand behind those products. We'll offer technical service and support to these customers. So clearly, we are a company that doesn't create [ph] . We do some creating [ph] where it makes sense, where we'll buy and sell. But for the most part, what we do, we manage on our own, whether we manufacture or provide some value add.

Our customers are clearly getting more global. And we are, as a global company, going to be alongside them wherever they are. That makes us -- gives us strength as a very -- as a strategic partner with them. We have sales in pretty much every country that does research or manufacturing of some sort, in 160 countries. We touch about 1.5 million customers in the world. We have several offices in many, many countries.

Typically, anywhere in the world, 90% of the time when customers want our products, we have it delivered to their doorstep in 24 hours. And that's happening even in the Asia now. So it's not just a U.S. or European phenomena.

We are becoming very integral to the supply chains of our customers, especially our large customers. And Eric is going to talk to you about how that's opening up opportunities for us to really manage some of the supply chains for our customers, in a way where we can convert a lot of the products to Sigma-Aldrich products and enhance our business.

e-Commerce remains very important for us. As many of you know, a big part of our sales goes through e-Commerce. It's an engine and a channel that's extremely important not just for taking orders, but also delivering content. We help a lot of the folks develop their experiments, they're good for [ph] scientists, and that becomes important for us worldwide.

And of course, the last point here is that the emerging markets remain important. We have been making a lot of investments over the last several years and expanding our capabilities and footprints in the typical countries, China, India, and many other of the emerging markets.

So as we all sit here and we talk about what's happening around the world and think about what are the key considerations, as we think about our future in this changing landscape, clearly there's an increased focus on health care and environmental safety. And actually, this is bringing about opportunities for us not just in the applied markets, clearly, but also in the way we help our folks in doing research and commercial business.

The industry has been in transition, especially in pharma and biopharma, where there's consolidation taking place. And frankly, that's not a bad thing. I think it's going to make that industry more healthy. Frankly, it gives companies like us more opportunity to partner in this changing landscape of consolidation.

We all know there's uncertainty, especially now, around the funding environment, particularly academia. It's no secret with what's happening, at least in the U.S., it's -- there have been headwinds in the academic setting, where researchers are very cautious, trying to figure out what Washington is going to do and if these automatic cuts are going to really hamper their ability to spend. I would say it's probably having a bigger effect on large capital items more so than consumables. But nevertheless, it is, then, a time of uncertainty for that segment of our business.

And finally, emerging market growth. We continue to be strong believers that the role of emerging markets will evolve over the next decade. And we will be there to seize the opportunities.

So what you're going to hear today is -- of course, you've seen the headlines. We have organized into 3 businesses, focused on the researcher, that's the Research segment, focused on the commercial market, so folks who are manufacturing and developing products as opposed to doing research. And then the applied markets.

But what I'll tell you is that, even within these business units, we have a razor-sharp focus on subsegments. And you will hear some of that. So we have dedicated groups within the Research business who are creating value propositions for the not-for-profit research organizations, academia and government. We are increasing our collaboration like we've never had before. We have a separate and dedicated group, even the customer-facing group, on pharma and biotech. And then we have a growing business through dealers. And you will, -- again, we have not talked a lot about our growth profile through our dealers around the world, but it has been a real success story over the last 2 years. And we have been growing our business, I would say, in a very impressive fashion through our dealer channels all over the world.

Again, in the Commercial business, the way Gilles has organized his business, he'll talk about that, we are focused on Life Science products and services. And then we've also got the electronics segment, where we are selling chemical precursors to both the LED industry as well as the semiconductor industry. And I think we have some exciting things happening. We have talked a lot about LEDs. So there are some really exciting things happening on the next generation of semiconductors, where we are playing a very critical role to help the semiconductor industry develop much smaller chips, and which they would find difficult doing without some of the products that we are producing.

And then finally on Applied, Frank is going to come and talk about what we are doing both on the diagnostics -- clinical diagnostics side, but also in other testing labs in the industrial setting. And we're going to take you through that.

This is a just a very quick snapshot of how we have mapped our old organization to the new organization. So essentially, what we did is we took all the products that we were selling to the applied markets, to the testing labs, that was sitting in our old Research business unit, filled [ph] that out and have put that into our new Applied business unit. And then we also took the business we were doing with Industrial Companies, as it was sitting in our SAFC business, and we have filled [ph] that out and put that in the Applied business.

So we've got our real core Research business now that's really focused on the research lab, which is about half the company. We've got Applied and our Commercial business, which is the other half. I can tell you the right side of this page, obviously, is growing much faster, and we will continue to see some strong growth on the -- this half of the company. And also, as you look at the left side, on the Research side, we'll talk about how we're going to get growth on to [ph] this, growing in the low single digits [ph].

Again, this is the Research business. Eric is going to come and talk about that. I would just hit to the -- if I look at the broad strategic tenets of what Eric and his team are doing, clearly is we are focused on innovative solutions in the research market. We are broadening our portfolio of products, putting more content into the sites that we have, into the researchers worldwide, and expanding our geographic presence and our channels. So we're going to build on that for you when Eric comes.

When you look at the Commercial business, clearly our focus is to be -- have an intense focus on our top customers. This is a segment where our top customers are huge, they're big, they offer great opportunities. So while we are not going to not focus on our smaller customers, we are, we're going to have a disproportionate amount of higher focus on our top 100-or-so customers. That's the strategy that we are using. Increasing capacity to meet market demand. This is an industry where we'll have to continue to add capacity and -- because the growth is so explosive. We will continue to do that. And finally, adding strategic capabilities. We have to continue to add more capabilities. We acquired BioReliance last year. That was part of adding capability that we didn't have, to get closer to our commercial customers. We acquired Research Organics also last year, which is part of adding these capabilities. So they'll come both organically as well as inorganically.

And then in the Applied business, frankly our strategy, first and foremost, is just to get closer to the customer, to the testing labs, to the Industrial Companies, where we have had some focus, but never had the kind of focus that we are having now under this new organization. So that's first, and I think it's going to pay some good dividends.

We are going to be a solutions provider here as well. Frank is going to talk about that. And we know we have to broaden our capabilities to really be a force in the applied markets. And that is probably going to guide us to making investments organically. Frankly, inorganically, we will also be looking at over here.

Just to mention a little bit around the growth rates of these businesses, what we saw in 2012. The Research business, as we have mentioned, grew in the low-single digits in 2012. We believe that, long term, this market is going to grow in the low to mid-single digits. We'll talk about sort of what we are going to do when Eric comes up.

The Commercial business, we grew in the mid-single digits in 2012. Clearly, as we look at our guidance here, we are saying mid to high-single digits in 2013. And then the Applied markets, again we have also been growing in the mid-single digits. But clearly, our plan, at least on the Commercial and the Applied, is to take those businesses to the high single-digit growth, and we will share with you our plans of taking those businesses.

And finally, none of this that I'm talking about would happen if it wasn't for the people that we have in the company and the leadership. Many of these folks are in this room. I'll just mention a few and maybe I'll just ask them to stand up.

Gilles Cottier on the left, down, he is our President of our Commercial business. He is, of course, going to stand here and talk to you, but Gilles is somewhere here. Hey, Gilles.

Eric Green, who is now running our Research business, he's sitting right next to Gilles.

Frank Wicks, many of you know, he's probably right there, in the corner.

Jason Apter, many of you have not met Jason. Jason is a new addition to our team. He is running our Asia-Pacific business, in the process of relocating to our headquarters in Singapore. Jason has had many years of running businesses in China, and as well as in the U.S. Jason, can you [ph] -- Jason, will you raise your hand?

And Gilles -- sorry, Gerrit Van Den Dool, who's running our European business now, he was in the U.S. He ran our U.S. business. Originally, he was running our European business and he's come back to help us manage our European business. And Gerrit is based in our headquarters in St. Gallen, outside Zürich, in Switzerland, and I know Gerrit is here today. There he is.

And then we have our functional leaders on the right. George Miller, who's our General Counsel. George?

We have Karen Miller, who's our Head of Corporate Development and Communications. I think many of you have heard from Karen in the past.

Doug Rau, who's our Head of HR and human talent.

And Jan Bertsch, who's our CFO. Many of you have obviously met Jan, back there.

And then Kevin Krosley, who's my Chief of Staff. He's not here, unfortunately, today. He is on travel time.

So with that, I'm going to turn it over to Jan. Again, the first part of this morning is really for us to speak with you. But hopefully, we'll have a healthy dialogue and give you ample time to sort of hit us with questions. And we'll have the whole team here once the presentation is over. Jan?

Jan A. Bertsch

Good morning. Thanks, Rakesh, and thank you so much for joining us today here in sunny St. Louis. And I do have to admit, it is nice to have you in our home so that we can talk to you for a whole half day, instead of running from meeting to meeting to meeting every 30 to 40 minutes, as we frequently do, when we're off talking to you in various parts of the U.S. So it's nice for you to be here, and we thank you for that.

What I want to talk about today is just a short recap of 2012, our financial performance for the year, and then talk about the outlook for 2013.

As you know, Sigma-Aldrich is an extremely diversified company. We are globally balanced in our $2.6 billion of sales, 47 -- or, excuse me, 43% in the total Americas; 37% in Europe, the Middle East and Africa; and the remaining 20% in Asia-Pacific. And we service broad end markets. As Rakesh had told you, 53% in the Research market, 23% in Applied and 24% in SAFC. And we certainly have a very diverse customer base, as shown here on the slide: 25% in the academic markets; research pharma, 13%; the dealers, 15%; diagnostics and testing is 12%; industrial applications, 11%; and SAFC Commercial, Life Science Products and Services 19%; and the remaining, SAFC Hitech. No customer comprises more than 2% of our sales, and no single product is more than 1% of sales.

We generated $2.6 billion of sales last year. That was up 5% from 2011 and on an organic basis, up 3%. Our adjusted operating income was $673 million, was up 3%. Our adjusted net income, up 2% at $470 million, and our adjusted diluted EPS was $3.85, also up 2%. We've generated solid free cash flow last year of $453 million. And the changes in FX rates reduced our operating income by $38 million, which equated to $0.22 of adjusted EPS. So without that FX headwind, we would've grown by approximately 8% [indiscernible]

We generated 3% organic sales growth last year, which was 1% from the Research market, 5% from SAFC and 4% from the Applied market. In Research, we had a stronger first half than the second half last year, primarily due to the sluggishness in the academic markets and also the pharma consolidation. And in SAFC Commercial, we also had a stronger first half, primarily due to the Hitech pricing environment last year, and I know that we have talked about that multiple times on calls. We had really good strong volume growth in the year last year in Hitech. But the pricing environment declined substantially from the beginning of the year to the end of the year, and we did see some reduction in that rate or pace of decline as the year concluded last year. And in the Applied market, we're pretty stable all year at 4% organic growth. Now the diagnostics and testing area, they grew solid mid- to high-single digits last year. And in the industrial applications area, it was a little bit softer, especially as we exited the year.

Our adjusted operating margin for the year was a strong 25.7%. So we really generated about 140 basis points of operating efficiency last year, and I'll take you through some of those things that we did on the next slide. Acquisitions had an impact of 70 basis points on our operating margin. Now that was really not a big surprise. When we acquire new companies, and in this case, primarily BioReliance and some of Research Organics, they have a lower operating margin and perhaps, a lower return on invested capital as we acquire them. And then as time goes on and we integrate the businesses, we grow the top line, we achieve the efficiencies that we had planned on, then we see stronger operating margins going forward. So we -- that's what our expectation is for these acquisitions that we had last year. And especially with BioReliance, for example, we anticipated 3 to 5 years to achieve our top line operating -- or sales synergies, and we're on target to do that. The incremental amortization of acquisitions cost us about 50 basis points last year, and we don't adjust our reported numbers for that. And FX was about 60 basis points headwind for the year on our operating margin. So in total, about 110 basis points of headwind from the unfavorable FX and the incremental amortization, and we were able to offset the majority of that.

This is just a snapshot of some of the ways that we approach operational excellence and efficiency in the business. Last year, we were able to optimize our footprint. We consolidated our U.S. central distribution centers into one in the U.S., the St. Louis and the Milwaukee center into Milwaukee. We've expanded the SAFC Hitech capacity by opening our new Taiwan facility in the middle of the year last year. And we consolidated liquid and powder media production.

On the strategic sourcing side, we generated supply chain improvements across the board in the company in many different areas, including freight and packaging, production, procurement, and we're not going to stop there. It's a big initiative for this year, and we'll continue to focus on this throughout 2013. And as Rakesh mentioned, we expanded our sites in Wuxi, China, and in Bangalore to enable localized sourcing.

We also focused on regional distribution efficiencies. And across the U.S., we consolidated our North American shipping carriers.

And on the operational expense efficiency side, this continues to be a big focus for us here on the SG&A side, controlling the SG&A costs. And as we grow the company, continuing to grow the SG&A -- or to keep in check the SG&A costs, so that we can become more efficient over time.

Our free cash flow was very solid last year, $453 million, generated by net income of $460 million and improvements in performance working capital throughout the year. In addition, we invested in our business. We spent $114 million in capital expenditures last year. And we had a little bit of timing at year-end, which I believe we talked about at the fourth quarter call, that may impact us in 2013, just on some timing on some of the working capital payments.

So we are reaffirming our full year 2013 guidance of adjusted EPS, which is expected to be in the range of $4.10 to $4.20. Now this equates to, on a full year basis, low to mid-single-digit organic growth. We expect in the Research segment to have flat to low single-digit growth in the first half, improving to low single-digit in the second half of the year. And we expect to see this because in the second half of the year, we'll have less of an impact related to the site closures on pharma consolidation. So we expect to see some favorability in the second half of the year on that. SAFC Commercial, mid-single-digit in the first half of the year and mid- to high-single-digit in the second half of the year. And here, again, we'll see some impact from the Hitech pricing. We saw a pretty drastic decline from the beginning to the end of the year last year, and we'll see that anniversary a little bit in the second half of this year, and less of an impact on us. But in addition to that, we'll see the booked business that SAFC has in place, coming onboard, some more of it in the second half of the year, as well as in the Services business. In the Applied markets, mid-single-digit growth for the year.

Now one other thing that I'd like to mention is that, in the first half of the year, we have 2 less functional shipping days than we did last year. And in the second half of the year, we have 1 more shipping day than we did last year. So our full year adjusted EPS, again, is expected to be $4.10 to $4.20.

So let's look just a moment at the first quarter. We expect flat organic sales growth in the first quarter this year. Now typically, I don't usually talk about shipping days because in this business, you win a day, a month, you lose -- or a quarter, you lose a day, and somehow, it all evens out in a year. However, in the first quarter, we have actually 2 less shipping days compared to last year, and we'll pick up 1 of those back in the third quarter. Now in our kind of business, especially the Research business, we're a very much daily volume-driven business. And so that has an impact on Research of about 2 to 3 percentage points of organic growth for us in the first quarter. And on a total company basis, that would equate to 1% to 2% of organic growth in the first quarter. In addition, sequestration resulted in larger-than-expected shipping -- or spending decline so far this year. Hitech seasonality, we talked about on the call in the fourth quarter, but the pricing comp for Hitech is the toughest in the first quarter, because we saw that fees [ph] declined beginning last year. And our adjusted EPS is expected to be about $1 in the first quarter of 2013.

Our expectation for adjusted operating income margin is to improve in 2013 modestly, from 2012, and a large portion of this improvement will come from increased top line growth for the company, and in addition, executing on our efficiency actions that we talked about just a minute ago. Now some of these drivers will be partially offset by investment -- further investment into the business. And you will hear from Eric and Gilles and Frank about some of the opportunities that we have. And we are operating under a new restructured company right now, so some of our investment is going to be to facilitate the growth opportunities in these business units that you'll hear from. But on a long-term basis, our expectation is to grow operating income margins by 50 basis points per year.

We're reaffirming our expected cash flow of $430 million in free cash flow for this year, or better. Our net cash from our operating activities is $560 million or better. And we anticipate investment in our business of about $130 million this year, netting to $430 million in free cash flow for 2013.

Now our uses of cash really haven't changed. We continue to maintain the dividend strategy that's been relatively consistent with the 20% payout of net income. And we'll continue our share repurchase program, at a minimum, to offset the share-based compensation dilution that we experienced. But a primary use of our cash, certainly, is to fund both organic and inorganic growth in our company. And certainly, our acquisitions have to fit in with our customer-focused strategy, that you'll hear about today. In addition, we are a very strong ROIC-minded company. And we'll continue to focus on businesses that we believe will generate strong shareholder value.

So in summary, we have grown our top line, on average, in the past 5 years, about 5% per year. We have a strong ROIC culture, as I mentioned, and we've grown our ROIC over that same period by 220 basis points and improved our GAAP margin expansion by 260 basis points. And all this has resulted in consistently higher returns to our shareholders than our peer group in the life science industry, as well as the broader market in general.

So with that, I would like to introduce Eric Green, the Head of our Research organization.

Eric M. Green

Thank you, Jan, and good morning. Welcome to St. Louis. It's -- I'm really excited to be here today to talk to you about the Research business unit. Many of you, I've met before. I've stood up here for a number of years talking about International and -- but I'm transitioning into the Research business unit, and what you'll hear today in this discussion is identifying ways to grow the business faster than the market, and that's our focus for the Research business unit. Today, I'll talk a little bit about the Research overview, the markets, the segments within the business units and looking after -- looking at customer-focused growth initiatives, and I'll put -- and with some guidance for the Research business.

Let me orientate you on the Research business unit. It's part of the -- it's 53% of the overall company, and it's about 79% of the old Research business. We're focused really on 3 different areas: one is we're focused -- as far as customer segments, we're focused in the academic, the government and hospital laboratory; secondly, we're focus in the pharma, the biotech research laboratories; and thirdly, there is a growing dealer network that we've leveraged to get into new geography, or to identify new customer segments that we were unable to penetrate in the past. So we have 3 distinct areas that we're focused on within Research.

So we have a tremendous opportunity to leverage the uniqueness of Sigma-Aldrich. We have a very broad portfolio of chemicals, biochemicals, life science tools and reagents. And if you look at our global footprint, with the expansion that we've conducted over the last several years in Asia and also Latin America, we have a very strong global footprint that is focused on delivering products to our customers, manufacturing, packaging, QC, consistently to the brands, a position that we have with our portfolio. Our e-commerce platform is world-class. It's rich both in scientific content and tremendous amount of traffic for the commerce of the portfolio. And with over 1.4 million end customers that we touch, we have globally recognized brands that is -- that if you walk into any laboratory in the world, you'll find our products on the shelf and being used day after day. The portfolio, from a customer mix, is roughly about half the business is in academic, government, hospitals; 1/4 of the business or 28% of the business flows through our dealer network; and roughly 24% through pharma and biotech customers.

From a geographic point of view, Asia-Pacific has grown over the last several years, and at this point, that's 27% of our portfolio; 35% in the Americas, so Canada, U.S. and Latin America; and the balance of 38%, in Europe, the Middle East and Africa. The market itself is roughly about $16 billion. We believe our position is slightly less than 10%, so that provides opportunity [indiscernible] .

So the trends that we're seeing in our marketplace is there is a shift in basic research from -- towards translational and applied research. And we'll talk a little bit more about where the opportunities lie. There are headwinds with the government funding constraints in the U.S. and Europe, particularly in Southern Europe, whether you look at the NIH and NSF funding protocols that they've recently announced, but also increase in cost sensitivity. When the pharma consolidation started to occur several years ago, we're still -- we're seeing that slowdown as far as the consolidation, although there are still some announcements in regarding to our customers that are looking to reduce their R&D footprint. However, there's an opportunity when you start looking at how large pharma is outsourcing -- continue to outsource with CROs, but now more focus in the academic side. In the emerging geographies, funding still remains attractive, not just in Asia-Pacific but Latin America, also in Eastern Europe, the Middle East, are opportunities.

So we reorganized the business unit into really 3 clear segments, and each segment has a dedicated leader with sales and marketing, business development, so that they're driving clear value propositions that are dedicated towards their customers. And when you look at the dealers' footprint, the value proposition we're focusing on is really allowing our dealers to access new customers in new geographies that we're currently not penetrating. The academic area, it's supporting the scientists to further advance their discovery, their research, dissemination of their information. Thirdly is the pharma, it's expanding the product portfolio and enable the -- to support the external dynamic of the consolidation and start -- and value sensitivity.

So there's 4 growth levers that we're looking at within the Research business unit. I just talked a little bit about the market-back approach, again, dedicating the sales and marketing organization, that they're just focused in their particular segment. That's creating new opportunities in the last several months, that is creating a new view of how we actually go after these particular accounts and better serve them.

The second area is expand reach. We have one of the best pipes to the end scientists around the world, but we still have opportunities to expand that reach. I'll talk a little bit further about how we're going to leverage our Dealers as Partners program, that was launched a couple years ago in Asia. And I'll also talk a little bit about how we plan to expand into other geographies, such as Russia, Middle East and Africa.

Our portfolio, by moving to a market-focused, customer-focused organization, does not mean what we're going to reduce our focus on the products, expansion of products, and innovation. So we're going to continue -- we're going to drive more products through the pipe through innovation internally, and externally, through aggregation.

And the last part is that there is [indiscernible] opportunities to leverage our operation, to get closer to our customers, integrate into their supply chain. And I'll talk a little briefly about how we're going to drive that lever.

So we have a real focus on broadening the content of products. And this -- what we're illustrating here is that we're using the internal resources to have a pretty robust scientific network internally at Sigma-Aldrich, but we're also expanding our collaboration with prominent research institutions throughout the world, so we can drive new product content through our portfolio. And I'll give you an example of one. This is the cell lines. We have 2 relationships here. One is with ECACC, European consortium of cell culture products, and they have a tremendous number of cell lines that are available, that we have a exclusive, through Sigma-Aldrich distribution channels, including Japan and the U.K. And with that, our customers are able to look at not just what we currently provide, such as the media, sera, the growth factors, supplements, but also starting with the ECACC portfolio of cell lines to engage in their research. In addition to that, we're launching this month, a portfolio of cell cultures, of Sigma-branded cell culture flasks, plates, in the areas of plasticware. It's complementary to our portfolio, and this -- and there was a recent announcement about our relationship with another premium manufacturer. We're able to take those products, branded as Sigma-Aldrich, Sigma-branded materials, and go globally to our existing customers. Again, what we're looking at here is expanding the portfolio around the workflow of our customers, beyond the traditional way of looking at our business.

The second area of innovation is collaboration. We have a strong collaboration with The Scripps Research Institute, and Phil Baran's group worked on fluoro [ph] atoms. And what you'll notice here is that, last year, the FDA approved 39 drugs. About 1/3 of these small molecule drugs had a fluorine-containing molecule, and this gives us an opportunity to leverage the research of the new fluoro-activated molecules to really drive milder reactions and higher yield.

So with our portfolio of customers, we're able to do the publication from that research institution throughout, in 2012, and immediately, we're able to launch the portfolio to support our customers on driving revenue with those products. So again, here is an example where, internally and externally, working and collaborating together to drive new product expansions.

If you look at our channel, it's quite robust. 70% -- 72% of our sales are direct, 28% of our sales go through a dealer network. And we're going to talk a little bit further about the dealer network, that's been a very important lever to penetrate new markets. And about 50% of our revenues are going through the e-channel, again, another opportunity to capture more customer growth.

The first area I want to talk a little bit further about is dealer network, I mentioned earlier about the Dealers as Partners program. We launched just a couple years in Asia, specifically in a couple markets, Japan and India, and Jason will give you greater detail on how that's being leveraged and growing that. But this is an opportunity to go into geographies in Europe, North America and Latin America with a similar program. What does it mean? Dealers as Partners program means that there's a concerted effort on identifying dealers who are taking your products to markets, new customers or new geographies. We are -- they are leveraging our technical service capabilities, our training and also doing joint calls to certain laboratories, to create the credibility of selling our products through their channels into our customers. That also gives us the opportunity to optimize the deployment of our sales organization. And also, it focuses on non-core markets. And if you look at the distribution today of 14% of the dealer sales going into the Americas and 25% Europe, 61% Asia, I think you'll see -- as we go forward, you'll see a health care mix throughout the world with our dealer program.

We'll look at geographic expansion. We have had -- we have been very successful in markets like China, India, Brazil with -- over the last several years, of going into the marketplaces, setting up the infrastructure and driving growth. Today, where we stand, where we're looking at and where we have dedicated resources focused on, Russia, Middle East and Africa, we take the same approach and tailor the offering in those particular markets according to the local market requirement. We'll use the various channel capabilities that we have. We have a very strong direct capability, we have a very strong dealer network capability and also an e-channel opportunity to leverage. There -- the need for our products are established and it's a growing need. So these markets we expect to be doubling the business over the next 5 years.

The channel strategy of eBusiness, 83% of the revenue through the eBusiness is for the Research business unit today, roughly 16% in Applied and slight in the commercial area. We had 55 million visits last year, and that's increasing. The adoption rates for Research alone is over 56%, so we continue to see this as a viable channel to leverage into the markets. The growth of the website is really -- the focus has been about acquiring customers, which means getting more volumes through the channel, bringing more content to the channel and the ease of ordering through our website.

The focus in 2013 is to convert the volume of channel that we have in our website to generate more revenue. And I'll tell you how, there's clear actions that we're taking to drive this. One is we're upgrading the system with more -- with our IS group, to really drive capabilities, being more customer-focused in the sense that we can tailor, through our analytics group, tailor specific offerings to our customers. We also launched a capability called Pubget, and I'll go a little bit deeper into that offering. It's a great opportunity to create more value to the researcher at the bench and tie it to our products. So as they pull [ph] through the research journals, they can see what products go along with those research units. Our objective is to get to about $1 billion in 2013.

Let's talk a little bit about the academic markets. I believe it's roughly about a $7 billion marketplace. We have roughly a little bit less than 10% market share. And we are geographically spread throughout the world. We believe this is a growth opportunity. As I mentioned earlier about some of the trends that we're seeing, government funding is going towards more of the applied and translational research. We're also seeing in academic, that there is an increase in partnerships with pharma companies, and you continue to see these announcements of these -- of the funds over the last number of months. So the opportunity for Sigma-Aldrich is to focus on the research with the increased funding from the public and private sector, because we do have differentiations, solutions, all the way from target identification to clinical trials. The other trend that we're seeing is the centralization of procurement at large institutions. And that gives us an opportunity because we've had strategic account management programs in place for large pharma for a number of years. And transferring that focus to a dedicated team in academia allows us to start creating value propositions and solutions to the procurement and stockroom management professionals at the -- in the academic market. And the third area, a trend that we're seeing is the increase of compliance and safety requirements at our customer locations. And here's where our customers have brought us in to identify how can we leverage your safety and regulatory data information, how can we partner with you with audits and consulting, or how we handle materials through our laboratories. And again, that is an opportunity that we have -- we are acting on, and we're seeing good traction on stronger alignment to universities. The account management team has been reorganized, again, focused on academia, but broken into strategic accounts, growth accounts, leveraging the inside sales to go after universities that we currently -- smaller universities throughout the world.

Let me talk a little bit more about the Pubget. There's about 300 -- in 2011, there was a survey that showed that there's about 300 research papers that are read by -- per scientist. And what we're seeing is that when scientists see products that are cited in peer-reviewed journal articles, that's one of the top reasons for the scientist to order that material. We've developed a system that we call Pubget, where we're able to have our customers go to our website and do a literature search, and we'll pull up that literature search for the customer to be able to review. And we've linked the products used in that research to our product portfolio. The way that, which -- converting this to monetize this opportunity is looking at how -- the analytics of how the -- what are the products that customers are looking for, the workflow, the techniques that they're working on, and then developing the capability, personalizing the experience that we offer to the customer. And this is work that's ongoing, that we just started, and we're starting to see a tremendous uptick on acceptance. Our objective with this program is to have over 2 million publications linked by 2014, and the pull-through of that will also be another 25% increase in traffic into our website.

Let me talk a little bit about the commercial strategy for pharmaceutical research. There's really 3 parallel processes we're looking at, integration in the science discipline, the supply chain and also procurement. And we have the capabilities in all 3 areas.

In the science area, to give you an example, we have looked at the products that we provide, the reagents, the chemicals, into the pharmaceutical organizations. We bundled it with further products of the cell culture plasticware portfolio, which is a bigger offering, to the workflow process for the customer. And as we go through, as we build more capabilities and value propositions, we're going to have a stronger hook to those customers beyond just the product. It can be in services, such as media prep, into the large organizations that currently are looking at customers -- or suppliers to actually outsource to.

The same effort in the supply chain integration, being deeper into our customer supply chain. And in the procurement integration is, again, looking at chemical synthesis, Aldrich Market Select, be able to source materials that are not commonly found in the marketplace, sourcing materials and then driving through a common platform, what we call The Science Place.

So let me talk a little bit about The Science Place. What this basically is, is a virtual storeroom. It's on the Sigma-Aldrich website and it's live today with selected customers. And what the focus is, with our products that go into our system, the richness of the content, the searching capability and our capabilities to source materials that's not readily available in the marketplace. And so we basically are filling these shelves with products, other suppliers if needed, to make it the richest experience for our customer.

And the research value proposition is about driving content and having one single place to go to that has credibility of bringing materials to the market. On a procurement value, it's about consolidation of suppliers. It's about leveraging one portal to actually bring more visibility and control of the procurement process for clients. And from the vendors that we're partnering with, it gives them access to customers that they may not have access to. And our whole focus is, we have visibility of all products and all services that these customers require through our portal. And we can make decisions on what products to add to our portfolio, expand and go deeper into the science. We believe this is a strong move forward to support our large pharma customers globally.

So I looked at the organic sales growth in the last 2 years, we had 3% growth and 1% growth, respectively, over 2011 and 2012. And the pharma in 2012 was below 0 because we saw a lot of site closures in the pharma sector in 2011, which had an impact in 2012. The dealers have grown greater than 5%, and that has been historically a strong growth opportunity for us. Again, not just in Asia, but in all geographies across the world. And we'll continue to focus on our dealer strategy.

So we look at the performance of Research going forward. The outlook in the first half of this year is flat to low-single digits, and the second half is low to single -- low-single digits. And we believe, as we see some of the site closures of the pharma organizations normalizing and also some of the uncertainty of funding in the academic and government research institutions, we believe that we'll see that in the second half [indiscernible] .

The long term, the focus of the unit is really driving, expanding the reach, expanding the pipes of customers and leveraging, whether it's a dealer, direct or an e-commerce platform, of the channel to our customers to capture more share.

The second is broaden the content. It's looking at the offering that we have, the product portfolio and adding new innovative materials to support the research discovery process. And the third lever is about leverage capabilities. It's leveraging the current infrastructure that we currently have, expanding on, which we can go further into our customers' supply chains in developing solutions.

I believe, based on the initiatives that we have in place, we'll be able to have more of a long-term growth objective of low- to mid-single digit [indiscernible].

So I want to thank you for your time, and I want to turn this over to Gilles Cottier, who will talk to you about the SAFC Commercial business.

Gilles A. Cottier

Thank you, Eric. Good morning. I've been told that we are running ahead of time, so I do believe that each run [ph] another 50 [ph] slides in my presentation on the slide. I'm sure you will enjoy it tremendously.

Now really, I'm very really excited about continuing to run our new SAFC Commercial unit. And I can tell you, this excitement was shared last week by our sales organization. We had our global sales meeting, and they were really excited about our new organization, and I'll tell you why we were excited. Because in a nutshell, we now have even more clarity in terms of our internal, both our internal and external communications about our business, with our internal resources and our customers. We also have an even more stronger alignment of our resources for manufacturing, operation and sales and marketing towards our market. And then -- and clearer focus to the customers that we serve.

Let me tell you why. What we did, basically, with this reorganization -- I don't know if you've been following our company for a while. If you remember, we had a segment, which was an important segment of SAFC, which was called SAFC Supply Solutions, right? Well, I was talking to Quintin about this some time ago. And as you know, Quintin was on the other side of the fence about 1 year ago. And he said to me, "When you had this Supply Solutions initiative, we never asked you any questions about it because we really didn't understand it," right? Well, so what we did is this. Well, the good news is that Supply Solutions doesn't exist anymore, okay? But seriously, what we did is this, okay? About 2/3 of that is now served in Applied.

We had a franchise in that business, which we had clear focus is to serve the maintenance [ph] customer. And it will continue to remain so, with additional capability on the Applied. But also, we had a big chunk of that, that was what we call industrial. And it really served a number of customers, market from cosmetics, and food and beverage, specialty chemicals, et cetera. And honestly, it was more a transactional business for us than anything.

And now -- I know that Frank is going to tell you more about that. He is going to have a clear focus on that, on these different markets and he will move on the transactional business to a much more consolidated view [ph] . Why don't Frank tell you more about it.

And then we had about 1/3 of that, that was already in the space that we retained. This is supplying for [ph] materials, for instance, buffers, et cetera, which I use in downstream processing for biological drugs. And that business already pertains to the supply chain of the pharma and the biopharmaceutical categories. And we will continue to take care of that.

So in essence, in a nutshell, SAFC is about 2 things and 2 things only, very simple. Our first platform, which is our largest one, is to provide critical materials and services that enable our customers to develop and manufacture drugs, whether they are large molecules or small molecules. And our second platform is to provide materials, critical materials to enable our customers to develop and manufacture, in essence, LEDs and advanced semiconductors [ph] . That's it, that's our business.

What is our strategy? Well, let me encapsulate it into one sentence, okay? We don't want to be everything to everybody. In order to be successful in that business, we need to be selective. We need to be selective not only in terms of market where we want to play into. For instance, biological drugs is a clear space that we are operating, oncology drugs, and providing these critical materials for that space is also core to us. But we are very selective into the market we want to play. But in addition, we are also very selective in terms of the customers we want to play with.

Now don't get me wrong. I don't want to ignore and we don't want to ignore any customer. But really speaking, if I want to make a difference with these customers, I need to choose the customers for which I am going to disproportionately allocate resources, right? And you start from sales, goes to marketing, R&D, manufacturing, supply chain and even capital resources. Because for these customers, I need to make a difference. And I call these customers our destiny account [ph] . They are the customers which are aligned to our capabilities. And let me just tell you, I think that we need to recognize the fact that we are not going -- in SAFC, going to revolutionize the way these customers are making or inventing new drugs. Honestly, our customers, some of our largest customers, they have more scientists in R&D than we have people in manufacturing and operation. So we have to be very specific about what we're going to do. And then we want to focus on this area, on the supply chain aspect, of providing this critical manufacturing material and services that can make a difference to these customers. And I will illustrate my purpose by giving you a few examples later on in my presentation about, how do we make a difference for these customers, creating value for the customers and tremendous value for Sigma-Aldrich [indiscernible] .

So the market, as I said, that we operate in, we are very selective. We are big, but more importantly, the markets that we choose to play, I mentioned biological drugs, high-potents, LED, et cetera, these are really subsegments of this broad market of the Fine Chemicals space. And these markets have one characteristic, is that we are looking for markets that are growing at GDP or faster than GDP. And it's certainly the case for the biological drugs space. It's the case for the LED market, even for -- it's a cyclical market, but on an average, it's growing also faster than GDP.

The other way we look at our space, and in terms of the capability we want to invest into, and we are going to continue to invest into. Let me tell you, we're using kind of a, I would say, a strategic filter, which we are using to decide where to invest, both organically and inorganically. And the first criteria that we use is really tapped into the essence of what Sigma-Aldrich has been for many, many years, okay, and continue to be. It's really tapping into this broad and deep scientific knowledge that we accumulated over the years around chemistry and biology. Right? And so we use that knowledge to really look forward in the commercial space, to make products that are not so easy to do, not so easy to make, tough to make, difficult to replicate, sometimes difficult to transport. And why? Because not only we can tap -- we know how to do this. But also, it's also a way for us to relieve the number of competitors that we have to go against everyday. Right?

The second criteria that we use is that we want to make sure that what we supply to our customers are really critical to the functionality and the performance of our customers' products. Because we believe that way our --

[Audio Gap]

customers. They're going to value quality, they're going to value supply chain transparency, and I'll come back to that a bit later, and risk mitigation. Right? This is an absolute element of the criteria that our customers are choosing when they choose a supplier. Are we able to mitigate the risk in their supply chain?

And then last but not least, typically, what we do represent a small -- a fraction, a small percentage of the total cost of the product that the consumer is purchasing from our catalog [ph]. In that way, I would say, we absolutely need to be price competitive because there's no way we can operate without being price competitive. But because of these 2 different -- these 2 aspects about value, functionality, critical to functionality and a small percentage of cost, I would say that typically, the pricing, the purchasing decision are going to weigh more in terms of the scalability, this quality at advantageous [ph] price. So these are kind of the 3 criteria that we continue and we are going to continue to use to select where we want to continue to invest in our business.

So our new organization is on the 3 initiatives. The first one is our core Life Science products business. And we are organized in terms of sales, operation and marketing around these 3 initiatives, where we supply these critical raw materials for both small and large molecules. Also, what we call our contract manufacturing services. These are basically our API and cGMP intermediates, that we built [ph] earlier, and that's about 60% of our business.

Another 20% is that we call our franchise around Life Science Services, which is in essence, basically our BioReliance acquisition, and that's another 20% of our business. And then finally, our Hitech platform, which is the remaining 20%. So that's the way we organize. We've got leaders for each of these businesses that are running our presence in this market. And I'm very, very confident that this organization is going to take us to new heights into our space.

Another way to look at our SAFC Commercial unit is to look at what we do in terms of manufacturing. As a matter of fact, when you look at the sales of SAFC Commercial, more than 90%, more than 95% [indiscernible] we make ourselves. On the service side, a lot of product that we make, but we do provide and, so to speak, manufacture, if I could say, to use that word, the assays and the analytical services that we provide to our customers. But in essence, everything that we do, we comfort [ph] our business [ph] , right?

And I can tell you that, if you look at that slide, it gives you a different slant, a different cut of the way to position the SAFC Commercial around specific unique manufacturing capabilities that we built or acquired over the years. They are also balanced in terms of our presence, geographically across the continents. Right? But also, you could cut in this way, 60% of our sales is capturing through the biological drugs. And we know that biological drugs are growing quite nicely and are going to continue to grow quite nicely. Another 20% is around small molecules, and a significant proportion of our presence is around these high-potency drugs, which are extremely critical for oncology. And oncology drugs represent a big chunk of the drugs that are developed in the pipeline of customers moving forward. And then the 20%, the rest of the 20% of our business is the Hitech -- is our Hitech presence [ph] .

I was mentioning risk mitigation, and I thought it was helpful maybe to show you this. Because on that slide, I tried to encapsulate something which is very core, very key and speaks volumes to our customers. And what you see there is that, in the critical raw materials and services we supply to our biopharmaceutical customers, over the past 2 years, both through the acquisition of BioReliance and Research Organics. Right? And then, an investment that we are currently making in an existing plant, where we were making only liquid media in Irvine, in Scotland, we are now going to add, by the end of this year, a significant footprint on [ph] the powder media.

And what you have here is unique in the marketplace, where we are, across the broad spectrum of products and services, really supporting our customers, not only in terms of capacity, but also in terms of the redundancy of this capacity for these customers. And it's critical because these customers, for these biological drugs, they are really looking for a second source. Well, they can have second sources by working with SAFC, because we have now -- we will have now 2 plants, 2 footprints that can support them across the world, okay, with the guarantee that we're going to use the same process, the same system to make these biological drugs, which are very sensitive to change. They don't want any change. And we can support these customers by mitigating this risk [indiscernible] in their supply chain.

We were just talking about BioReliance, so let me just give you a quick update on this acquisition. And let me tell you, first of all, I'd say that it's true that the first year of the acquisition, in terms of the performance of the business, has been below our expectations, but it was primarily due to 2 things. First of all, on the toxicology service play, I think it was primarily due to market conditions, but also, I think, due to the number of major players in that space. We are the small player. And I can tell you that the beginning of the year is looking much more promising for that portion of the BioReliance franchise. And then on the biopharma services, Biologics Testing services, it was due to a number of onetime events that they enjoyed, linked studies that they had in 2011 that didn't repeat in 2012.

But on the very positive, there's 2 things I'd like to tell you. First of all, the broad management team of BioReliance remains in place, is remaining in place. And I think it's a very important factor in the service business, where this continuity and this relationship between our franchise, with BioReliance and the customers that we are servicing. And we've been very, very specific about protecting that business, and we're going to continue to do so.

The second piece is that we planned to have a leadership transition for the business a year ago when we acquired it. Charlie Harwood, who came last year to our Analyst Day, is going to retire. We planned for it with him. He's going to retire at the end of this month. And I'd really like to take this opportunity today to really thank Charlie for working with us, to enable a very smooth transition to that business, from BioReliance to the SAFC and Sigma-Aldrich [indiscernible] . And then we appointed a new leader for that business, his name is Archie Cullen. And Archie has been working with us for many years. He's been a very successful global sales leader for our Life Science product portfolio, and I'm really looking forward for Archie to continue his path of success and growing and supporting our Life Science Services platform moving forward.

So I was mentioning earlier today our -- is that the account -- these accounts, for which we are disproportionately allocating resources, that are bringing value not only to them, but also to our company. And I just want to maybe take a few minutes to give you just a few examples that cover the spectrum of biological drugs, small molecule and electronics play, where we are delivering value for the customer and for Sigma-Aldrich and SAFC.

The first example is about a customer that was facing the need of increasing significantly his vaccine supply to meet market demand. And he came to us and then we worked with him, allocating our resources in R&D, technical support, operations. And that's the work that took some time and persistence. But we were able to work, in collaboration with our customers, we increased significantly and optimized the media, but increased significantly the yield of this process. And the consequence, our customer was able to meet market demand and probably avoid having to build an additional capability, for example [ph] . So it's really a win-win for both parties, and we're continuing to work with this customer to look for further projects.

The second one is on the small molecule space, and this one is a 10-year long partnership with the customer, where we are -- work with this customer in collaboration and even prioritizing resources, capital investment, from discovery to launch. The drug now is being approved. It's going to be expanding with further indication, and we are their CMO of choice for that business. And that's really also something that it takes time. But this effort, this persistence, this allocation of resources is making the difference for our customer.

The last one pertains to our electronics play. And this one is really the one that I would say leads up into something around our deep industry [indiscernible]. Right? Especially in respect of what our customers' strengths are. So we're talking about customers that make chips. They probably have more competency as being the electronic engineer and should [ph] assist, we bring our knowledge of chemistry. And then we're working with this customer also for a number of years, and we developed this critical precursor for semiconductor that enable them to drive the performance of the chips they are making. And so one of these compounds that we developed is now being used in this -- if you're familiar with the 28-nanometer node, 28-nanometer node, I believe, is starting to become commercial late last year and now ramping up. And you can find the chip that are using one of our compounds probably in the latest laptop, smartphone and tablet, which are on the market. And we're already working with several of these customers to the next-generation, the 20-nanometer node, the 60-nanometer [ph] node, in order to -- and then being qualified with these key precursors that are going to continue to help our customers improve their performance, drive higher [ph] performance of the device that we are all using.

So really, we can, just by a few examples, show you that not only we are bringing value to our customers, but the lifetime sales value of each of these opportunities really represent $50 million to in excess of $100 million of sales compounded for Sigma-Aldrich. That's what we mean by disproportionately allocating resources, making the difference and driving the performance of our business.

So let me wrap it up for you. In 2011, we definitely enjoyed a stronger, a good solid double-digit growth, 11%. This was tempered last year, probably some of the cyclicality in our Hitech business impacted us. But we are looking to continue to grow that business, as Rakesh and Jan told you. We are looking to grow mid- to high-single digits, probably with a slower start in the first half, but an acceleration in Q2 and Q3.

And let me tell you why I'm very confident that we can deliver that. First of all, okay, as I said earlier, the markets that we serve are growing, for the most part, at GDP or faster than GDP. That's number one. Number two, we are going to continue, okay, to add strategic capabilities, both organically and inorganically, to continue to enhance the value of our offering to our customers [ph] and to become even more meaningful in the future. And last but not least, I can tell you that our, what we call this customer intimate approach, with these key accounts, these top customers, these strategic customers, are absolutely fundamental in our approach to market. And I am personally involved, okay, myself, and some of my colleagues that are here, to continue to work with these customers, to work with our sales teams, to be heavily engaged in, to not only drive and help the business as it stands today, but to elevate the level of conversation we're having with this these customers, to get into meaningful, strategic relationships that are going to make a difference with these customers.

So thank you. I think we should have more good news in the months and years to come, related to our customer-intimate approach in SAFC. And I'll thank you for your attention. I think that we're going to have a break now.

Quintin J. Lai

Thank you, Gilles. We are tracking a little bit earlier and ahead of schedule. So why don't we go ahead and break now. And for all of those of you on the webcast, we will resume at 10:30 Central Time. So we'll see you all back here in the auditorium at 10:30 Central.

[Break]

Quintin J. Lai

Hi. Good morning again. So let's go ahead and get started. Our next presenter is the head of our Applied Business Unit, Frank Wicks.

Franklin D. Wicks

Thanks, Quintin. One of the things I was excited about today is really it's the first time I can stand before you and tell you about our new business unit for the applied markets. So in 2003, when I first moved out of the Research business over to the SAFC business, our business was a little over $200 million at that time. And over the next 5 years, we were able to triple the size of that business. So my intention is to be able to do the same thing here, x period of times [ph] . I would hope that once they're here, a few years from now, I can say that, look back and we can all feel good about it.

What I intend to do is just give you an overview of the Applied Markets, give you an idea of the size, the growth opportunities, look at the market segments and, specifically, what our strategy for growth there is, give you some examples from customers, actual products or solutions that we've created for those customers and then finally, some long-term guidance.

We've seen this from a few of the other presenters, I just want to, again, tell you, as we got into creating the Applied Business Unit, it was about 2/3 Research and about 1/3 from the SAFC business. Now, about a year ago, we started working on a strategy. We worked together with the team, not only internal, but some external help, to really examine the various markets that we play in, and adjacent markets, to look where we could find better growth than what we have been seeing in the Research market.

As we identified those markets, we took probably a good 2/3 of the year to really understand those, look what the opportunities were, clearly look at our own capabilities, what could we leverage into what different markets. So combining our capabilities with the opportunities, and then really realigning ourselves to those different customers. So probably the last part of the year, we actually looked at those customer types and saying, "How can we more effectively reach those customers with the capabilities that we have."

And so for the Applied Markets, what we're looking at is the diagnostic customers. It's also those customers that do diagnostic or clinical tests, and it's also looking at the testing labs. Testing labs, we're talking about testing for food and beverage, environmental type tests. And then finally, in the industrial area, we're looking at providing sort of a number of different subsegments, particularly raw materials going into those specific areas, as well as providing solutions to those customers.

Now one thing I want to point out is that, when we think about the applied customer, there's a slight difference in what we see in either Research or Commercial. The applied customer is one who, most of the time, is sitting down trying to figure out, I've got to do a certain kind of test. I've got to figure out how to analyze a particular sample. So when they do this, we're looking at a -- different market segments that you see is listed on the slide. We're looking at markets that are growing at mid- to high-single digit levels. When they actually are doing these tests, they're looking for tests that are simple, that are accurate, than they can do them quickly, get an answer and move on.

When I look at our capabilities that we're leveraging in this area, particularly, sample preparation is the key strength for Sigma-Aldrich. A lot of this was built around our Supelco franchise, and then eventually also some key products in our biology area, to provide products like separation products through a lot of different reference standards and reagents. But not only are these particular products that we sell that are on the shelf, we're also working with customers to provide custom solutions. So it's been having that ability to be able to sit with the customer, hear what the problem is and then bring that back into the organization and begin to figure out how we are we going to solve this problem. And then providing a solution for them.

Of course, the opportunity there is that it's not just a $400 transaction, it's a much higher level of return and price that we can get for those types of capabilities.

The other aspect in here, different than probably the research customer, for the applied customer, it is the much more regulated environment. When you look at the types of things we're talking about, everything from FDA to various types of ISO level quality: The medical device, 13485; or in the reference standards, area 17025, which means you have the capabilities of producing certified reference materials.

Now these markets are large. As we look at the clinical diagnostics market, we're talking about a $55 billion market that's growing over 8%. On the industrial testing side, it's a $16 billion market growing at 6%. The industrial testing area, we're looking at, as I mentioned, food and beverage type testings, environmental testing, and it might be also in-line QC for manufacturing. When we look at the various macro economic dynamics that are affecting these markets, especially on the clinical diagnostics side, if you look down that list, we've got growth of chronic diseases and infections. We see more and more people getting diabetes and other types of chronic diseases. We also see that there -- a lot of these new tests that are coming out are much more complicated. There is much more high value in some of these tests because of the types of answers we can get. That really comes along with the personalized medicine. Because the more personalized it is, the more, of course, complexity is usually involved.

There's also decentralization. If you look over the last 10 years, and the way this market has evolved, there was a point in time where it was decentralized and then you've got build up of all of these, basically, large reference laboratories, where you have lots of high-volume tests going on, and then, I think, as things have become more personalized and looking for simplicity too, is that these have become more and more at point of care, decentralized.

The other thing that's important in this marketplace is the emerging market, especially as you see continued growth, more middle class and everything going on into these marketplaces, they want the same health care that we have here in the U.S. or Europe. So this, again, is creating a dynamic growing marketplace. On the industrial side, it's also the growth in population. You have urbanization going on. This really has unleashed a number of things, increased regulations, as well as more consumption. And with that, the emerging markets again, plays a key role.

The other main area is our industrial offering around these industrial customers. There's multiple market segments, I'll go into later, that we're actually looking at into this area, but again, it's a $38 billion market that's growing at about 3%, and those same macroeconomic factors that I mentioned apply in this area as well.

Just to kind of put it in context, these are very large markets. We have a very small market share with about $600 million in 2012. Of that $600 million, about half of that is in the diagnostic and testing area, the other half is in the industrial area. When you look at the diagnostic and testing, what we provide, we provide products from raw materials supply to research reagents, to components and assays to perform tests, including analytical standards. Now on the industrial side, we're targeting specific industrial segments here with raw materials or solutions to meet our customer need.

One of the things that is something we've never done before at Sigma-Aldrich, which is an approach that we're doing with these customer types, is that as the Applied Business Unit, with our sales force, we're reaching out to these customers completely. We supply everything from the small bottle to the manufacturing quantity and that is the difference. Now why is that important? We're trying to understand what these customers are doing at the research level, because as we understand that, we can actually, hopefully, get spec-ed in at an earlier time as part of the components that they need, as they continue to grow and develop those products.

As we look at the future, I'm looking this year at mid-single-digit growth, but as I go down, building the capabilities that we're going to do over the next short period of time, I would look at this to move to mid-single to high-digit growth.

A couple of just other things that I'd briefly mention, I think it's good to point out that as we look at the food and agriculture area across the world, there's a lot of new regulations that comes in, especially in the whole area of food. A lot of this has been because of a lot of the food recalls that you've probably heard about. In the last 5 years, food recalls have actually tripled in the United States. A lot of this is because of the urbanization. You got more people living closer together. You got more food requirements that have to be shipped across borders, and so there's more testing going on.

Now, in the environmental side, more focus on the environment, there's more regulations. This is a place where I like regulations. So we've got a Congress that seems to like it too, but this is an area, actually, where it increases the amount of tests needed in the marketplace.

And I talked about the urbanization, and 2008 was the first time in history that 50% or more of our population lives in cities. So again, we got more people living closer together. It creates more consumption, more disposable income and, at the end of the day, it creates more tests.

When I talk about these tests, you saw this slide earlier from Rakesh, and that this is the typical workflow that's done for any type of test. First of all, you start off with a sample. Now this sample can be air, water, some environmental type of test. It can be a biological sample. It can be a piece of a crop, food, anything like that. That sample has to be prepared in some way. That means it has to be prepared in a way that you can actually do the analysis and test to see what's going on. The next step is the detection itself. Once you prepared the sample, you've got to figure out what do I have? How much do I have, and I'm trying to identify? And then finally, you're going to get some sort of an analysis to get the information that you need.

If you look at where we are today with the Applied business, I mentioned sample prep is the area where we feel like our capabilities are the strongest, and these are the areas that we're going to leverage off of as we begin. We have chromatography columns, both LC and GC reference standards. To recall, we made some acquisitions recently. I think, when we were standing in front of you last year I talked about, in the analytical area, a strategy to be -- we called it the Aldrich of Standards. What we meant by is that we would have the broadest selection of reference standards for our customers. These reference standards are used every time you do a test. You need to be able to compare it to some sort of standard. So this is a very important part of the portfolio.

On biological samples, there are ways in the sample handling that you have to either cleanup the sample, so that you can actually find what you're looking for. Then there's sampling devices. And again, with our Supelco technology, we have capabilities of creating devices to almost sample anything you can imagine. DNA/RNA kits, oligonucleotides, PCR reagents, all these play into that sample prep area. Today, on the detection side, you have to use those standards to -- I have to use various columns to separate the product and, finally, analyze what you need. What I see as our potential areas for growth and building out of capabilities, actually fall more in the detection and the analysis areas. In other words, the goal here is to create complete solutions for the customer. So when we go in there, we can now give them what they need.

Now our essentials business, Lab Essentials business, actually provides actually a platform across all of these areas, as well as all of our customer segments, as part of the platform for growth as well.

Let me go into the diagnostic and testing area first. We look at this group of customers in 3 different segments. It's customers who do manufacturing of diagnostic kits, so in-vitro diagnostic manufacturers. Second group is those who are doing the diagnostic tests. This can be the large reference laboratories, it can be doctor's offices, it can be CLIA labs, those types of things. And then finally, the testing labs, which include food and beverage, environmental, other types of analytical testing labs along those lines.

So if we look at each of these customer types in the diagnostic manufacturers, I'm talking about those who make the instruments, their reagent suppliers, kit suppliers, also medical device folks, companion diagnostics of the key customers. What we provide today is raw materials that goes into these customers components for some of their tests and we actually also do OEM, where we actually kit it for them, package products for them. We'll either provide those products back to them to kit or we might do that for them as well.

In the diagnostics and clinical area, we're talking about customers that actually do the test. These are the large reference or commercial laboratories. They also have hospitals, CROs, also maybe people doing sports doping, much more popular topic in the last few years. Again, when we look at our offer here, it's raw materials, standards play a big part in this area, workflow components. And then finally, in the food and environmental testing, the customers are either the test providers or large government or public health labs.

Our product offering, again, is the raw materials, standards. And also notice, PTs, what we're talking about here is proficiency testing. So what's this capability is, is that some -- many laboratories need to be able to see that they actually perform their tests accurately, it's probably more so in the environmental testing areas. so what we can do -- what we do here is we provide like a package of tests that they have to run and provide the data back to us and then we are able to tell them, yes, you're doing these tests and you're doing them accurately. This is a service that usually has to be done about every 6 months, so it's returning and we are able to provide that.

The growth strategy for the diagnostics and testing revolves around, first of all, the offering of key raw materials that we have. These compose things such as buffers that are used in many, many aspects of different types of kits; enzymes that are used in various types of identification; and then biocides, various things to keep, basically, contamination from happening in samples.

Now we also are expanding our offering, as I mentioned, on the reference standards. We're going to continue to expand that breadth. We are probably #1 or #2 in this marketplace for standards. The LC/MS consumables, this is liquid chromatography or mass spectrometry type of consumables that are used in either clinical applications or various other types of workflows. Then I'd also emphasize for this segment, the analytical range of products is one of the key areas that support what we're trying to do and accomplish. If you remember in the past year, as we've talked about this area, as one that's consistently grown well for us, so we're building on that same franchise.

We also have products used in air monitoring and industrial hygiene. We're working with more different customers across this leg [ph] . Another important aspect is this has continued to raise our level of quality, which is required for this market segment. We have areas of the company we're going to continue to push the medical device quality systems into, so that we can provide a broader range of products for these customers. And then finally, we're going to leverage our supply chain across the company.

For many of the back office functions or the order management functions, we're sharing those capabilities with SAFC, so we didn't build redundancy and we can provide that high level of service that SAFC has provided in the past.

One other very significant point is that we're -- because of our refocus onto this group of customers, we are increasing the coverage from a sales point of view. When I look at the type and the number of customers that we have in this area, we probably -- 75% of which, we probably never have called on before. So we think that's a significant opportunity for growth. You might say, "Well, why didn't you do that?" Well in a lot of these testing laboratories, they tend to be decentralized and spread out. So if you're in a territory as a sales guy, a lot of these are small customers. But if you approach these differently, you can look for centralized purchasing or other things to access these laboratories, we can take advantage of it. We're also trying to look and take this whole capabilities to these customers and, hopefully one day, be able to help them develop their next tests that they're trying to offer to the marketplace.

I just like to give you a few examples, give you a sense of what things that we have done. We had a customer that came to us and said that they are trying to do a test for lung cancer identification. In this lung cancer, one of the problems with the sample was that they had high abundant proteins that were getting in the way, and so we were able to offer a separation device, we call Seppro, that allows them to take those high abundant proteins away, so they could identify those low abundant proteins that indicated that there was cancer or a problem. This same product can be used in many other ways in sample prep for other types of tests, and that's what we're working on now, working with other customers the same way.

And also recognize that this was a customer we probably wouldn't have called on before. It's a CLIA lab. These laboratories tend to be smaller, but these are very important ones for the innovation that comes into diagnostics. So this will be another focus for our business.

In vivo diagnostics, one of the other areas in the last year or so that we've been working with is being able to provide C-13 urea for what's called a breath test. What is this? So people who have ulcers or stomach cancers, it's usually caused by a bacteria, H. pylori. Today, at least in the U.S., the major test to figure out whether you have that is to stick something down your throat, they will look what's going on, swab it and then try to grow it up to see what's going -- whether you have a problem.

In the breath test, you actually ingest some C-13 urea and then your sample of your breath is taken out, and that CO2, when it's -- if you have the bacteria, C-13 CO2 is released, and so that you can see that you have a problem. This is widely used as a diagnostic outside the United States. So it is a very important product. Why is it big? Big for us is because we're basic in the producing of C-13. We have our facility in Miamisburg, Ohio, which actually produces the large quantities of C-13. They actually distill carbon monoxide, enrich the C-13 from that.

And then I've mentioned the Cerilliant product. This is in our certified reference materials. One of the areas we come across is pain management clinics, again, a customer we probably wouldn't have called on before. But in these pain management clinics, the doctors are trying to work with their patients to make sure that they're not abusing those drugs. They're very easily abused and so these patients are monitored, usually on a weekly basis. So we actually work with those clinics and provide certified reference materials so that they can detect whether there is abuse going on. And what's good about that is every time they do a sample, they need more reference standard, it's a consumable. And you can use up to almost 10 certified standards in some particular assay. So it uses a lot of them. And this is a very key growing area for us at the moment.

Just briefly about the industrial, these are big areas. What our challenge here is, actually trying to find some segments where we think we can be more successful and, again, back to the concept of leveraging our capabilities. We look at the different 3 segments, we've divided it up into consumer products, chemicals and agriculture. And the consumer products, we're talking about the flavors and fragrances. We have a small business going in here, it's growing nicely. Food & beverage, cosmetics & personal care are in this consumer products area. On the chemical side, we're looking at specialty chemicals, petrochemicals, healthcare, med device and contact lenses. Then on the agriculture here, we're talking about just agricultural companies and food processing companies.

The idea here really is to improve the connection between the research and the commercial quantities. Mentioned before, about 2/3 of what we offer to this is research product. But it's really working with those customers at an early stage and seeing how we can leverage to offer the manufacturing quantities for these customers.

Just a couple of stories here to give you an idea of how we've worked with these customers and solve problems. We had one customer that actually manufacturers transformers that are up on the light post. All of us have experienced those failures when the lights go out. But one of the difficulties they have is, is there a way to predict when you are going to have a failure. So we worked with this customer and actually created a monitoring device that actually detects the gases within the transformer itself. When these gases are actually analyzed, we provide the analytical, let's say, consumables that were necessary to analyze those gases and they now can detect when a failure is going to take place.

Another product that we offered is the one in the lower picture there. Again, an industrial hygienist came to us and said, one of the difficulties we have in, especially, in areas like refineries and other industrial places is the exposure to isocyanate. So we need some way to monitor that, when employees are being exposed to this in a way that's not good. So we actually provided the sample handling device. Again, that is able to capture that and then the ability to analyze that.

The key aspect here is actually getting into the customer, understanding where the problem is, and then being able to deliver a solution in a way that meets their needs.

So just a little bit, if you look at the where we've been over 2011 and 2012, about 5% growth over the last couple of years. I do want to emphasize that 5% growth was done with, I'll say, little to no focus. So as I look forward, the things we've done differently is we have realigned our resources around these customer types. So that we better understand their needs, that we can reach them, there's better sales coverage. We've added resources to be able to do that. So as I look forward to guidance here, I'm saying that this year would be mid-single-digit growth. But as I look forward, by expanding our portfolio of materials, by extending to the more complete solutions across the work flows, leveraging our existing sales channels and entering in to these new adjacent markets that we haven't covered as much before. So with that, I think we can drive this business to mid- to high-single-digit growth.

So let me reiterate, I'm excited just because, 31 years, I'm getting to do something again and build something new. And I think it's one of the great opportunities that Sigma-Aldrich has provided, is that it's never boring, because we've got some new challenge coming along. Thank you.

Quintin J. Lai

Jason Apter, our head of Asia.

Jason Apter

Good morning and welcome. I'd like to, again, express our appreciation to you guys joining us today and really express my excitement to be here with, not only in front of you today to speak about Asia Pacific, but also with our organization at a very exciting time in its history.

What I want to talk to you about today is give a little bit of an overview of Asia Pacific, talk about our current market position and some of our strategic thrusts going forward, and then really get into a few of the core initiatives or the pillars that we are driving in Asia, to allow us to focus on the customer and drive greater than market growth. And then lastly, obviously, what I think everyone's looking forward to hearing is what our guidance for the year is going to be and looking out into future years.

So again, just to kind of look at our mission in Asia and how we look at our business. We really see ourselves as being the local global partner, and not only to our customers but also to our internal global business unit, where we're operationalizing the global strategies for the region and basically customizing it for the needs of the region.

We've built a very strong franchise over the last 35 years, dating back to our entry into the Japanese market in '78, but we've got a very strong channel across all areas, whether it be direct, dealers or our eBusiness channel. We've got a very strong and developed distribution and logistics infrastructure, which coupled with investments we've made recently in both China and India. And then lastly, we continue to increase the scale and our depth of localization capabilities, to be able to really bring both operational and technical expertise to the region.

If you move over to the right side of the chart, our business today Asia is about just over $0.5 billion. And year-over-year, we're able to grow that at about 7% performance growth. If you actually tease that apart a little bit, moving down to the left chart, 50% of our business, roughly, is in developed markets, which grew in low-single digits. On the other side, though, the other 50% of our businesses in very high-growth, emerging markets, which we were able to enjoy double-digit growth last year even in a tough environment within Asia.

Over to the right, you'll see how we split our business in Asia across the new business unit segments. So the majority of our business, 70% of it, actually resides within the Research business, which last year we were able to grow at mid-single-digit growth. If you look at the other 30%, 12% of it is in the Applied, our new emerging business, and 18% of it is within Commercial, both of which units grew at double-digit growth last year.

So again, we're very excited even within Asia, as we begin to break out the Applied business and refocus the Commercial business. Those areas, for us, are providing significantly higher growth than traditional markets.

Talking about a little bit of our franchise. In Asia, we've really built a strong foundation to build off of. Today, we are already comprised of over 20% of our global business. We make up 10% of the global workforce with over 1,000 employees. So we've got a very well-established footprint now, with 25 locations over the entire region. And we continue to invest. We've put over $75 million into the region in the last 5 years.

Just some highlights. Last year, we inaugurated our chemical precursor facility in Taiwan, our distribution and logistics facilities in both India and Wuxi. We actually rolled out, at the end of last year, a website specific for the Chinese market, where we spent a lot of time on focus groups to really customize that experience for the Chinese market.

We -- earlier this year, we expanded the -- and opened our expanded global shared service center. And in the future, coming weeks, I will be moving over to Singapore to really develop our Asia-Pacific headquarters. So a lot of things going on, and a lot of exciting things going on in the region.

And this shifting to our strategy, and we've tried to keep a very simple 3-pronged strategy that's grounded in customer intimacy, expanding our products and services, and really our operational excellence. Now from a customer perspective, we continue to see the need to get closer to our customers, and essentially bringing them a local customer experience. And again, It goes back to what I just spoke about with our website in China, is really bringing that customer experience to the local market. Our products and services is really drilling in on that deep knowledge of the market and that local customer experience, to understand what are the right products we should bring to the regions, products that are specific for the regions.

And then lastly, we know that we need to continue to push out our capabilities from with that -- or in the U.S. and Europe, to really localize those into the region, whether they're operational, production, quality control and even in the future technical capabilities, to be able to explore our customer base from a technical level

more.

I'm not an economist, but I think it's fair to say 2012, relatively speaking, was a tougher year for Asia. Everyone knows and you know, there's been a little bit of a slowdown in China, a slowdown in India. And those are 2 of our largest-growing markets and really what a lot of the growth has been built on in the past.

The good news is, is that there's a lot of good signs that things are starting to pick up and maybe we have hit the bottom as far as the slowdown. We're very optimistic about what's -- about the future within Asia this year, again, with the new political leadership across the region, and their edict to really stimulate growth in each of their respective countries.

So bringing it back to Sigma-Aldrich. And again, as I told you, our target in Asia is to grow above the market. And what we believe, in aggregate, including both the developed and the emerging region, is that the market growth is probably about mid-single digits. And what we've put in place is another very simple 5-pillar strategy, 5 key things we need to execute in order to achieve this above-market growth, essentially get to the high-single-digit area, which we've been in the past and we believe we'll be in the future.

I'll just give you a little bit of insight of each of them. And the first is our Dealers as Partners. And as Eric had spoke about earlier, we recognize the value that our -- that the dealer network really brings to our franchise, and essentially have worked to foster our relationship with trust and collaboration with our dealer network. Now it's very different across the region, and I wanted to give you 2 case studies.

For example, take our business in Japan, which is a very highly distributor-heavy business. I think 90%-plus of our business goes through distributors in Japan today. But as you take -- keep -- tease this apart a little bit, almost 80% of our sales goes through a small subsection of dealers who are relatively larger. And so what we've done is really focused on establishing that relationship, the training programs with them, and really creating an incentive for them to be successful and, in turn, for us to be successful with them.

On the flip side, in India, for example, we have a very strong direct franchise. But there are locations in India and smaller niche subsegments, that we just couldn't effectively reach with our direct sales force. So we established a larger, more fragmented dealer network of smaller dealers, but -- and we added 100 of them over the 3 past years, but this really helped us tease out the niches in the market, and get to areas that we just couldn't get to with our direct force. And we've grown that actually. Our India business has grown in double digits, but we've grown the dealer network from 20% of our business now to 30% of our overall business. So it's been a, again, a very strong success story of really leveraging and using the right strategy with our distribution network.

Moving forward, we do see opportunities to really define and structure these networks in Southeast Asia. ASEAN is an extremely attractive market these days. And also in Oceania, into more customer segments like, for example, the mining segment, which is booming down in Australia.

On the opposite side, where we do have these established and more defined structures, we want to now take this to the next level and increase the collaboration to really enhance the experience for our dealers and again, incentivize them to want to sell Sigma-Aldrich.

Our second pillar is our value segment strategy. And this is a very simple strategy. There is an area of the market that we just couldn't traditionally touch with our premium products and our premium branded products. And it was really a segment of the market that was using, for everyday use, these regular lab reagents that they were using, not for publication, a little bit higher volume. They needed less stringent quality specifications. And -- but it was a bit more price sensitive. So -- and again, what we did was, with the notion of reliability, simplicity and affordability, have released the value segment offering under the Vetec brand, which we're releasing across Asia over the next 2 quarters.

Our third pillar is really our channel distribution strategy. And again, this is an example of us taking our existing customer base and augmenting our portfolio with a new range of products that are adjacent to what we do today. The lab products market in Asia is about $8 billion to $10 billion. And really, we focus on about 35% of that, in chemicals, reagents and kits. But there's a whole other segment down at the bottom there, the consumables segment that goes along with it.

So again, we have been putting in place a strategic partnership with both multinational brands and even our own private label brand, to really augment our portfolio. And we're not going to do it across-the-board, but in areas where we can provide a stronger solution to the customer. And take, for example, as Eric had spoke about, the cell culture labware, and where we have all the reagents, the media, the growth factors, the reagents that go into cell culture research. Now we can provide also the plasticware, for the researchers that do the experiment, in a full bundle. So it's an area where we can add value and aggregate the portfolio.

Our fourth pillar, as Frank just talked about, is really the applied markets. And we opportunistically looked at a lot of applied markets and have been actually very successful sowing the seeds, and now harvesting some of these. And then as Frank talked about, we are localizing reference standards, we've got the C-13 breath test in China, we've got air monitoring systems and other programs going on with tobacco companies and seed companies, and really providing solutions for their products that will go into more applied and commercial applications.

And again, we've been very successful. We've grown this at double digits over the past, but we're really excited now, with the focus and the backbone of a global franchise in the Applied markets business unit, is now to really start to focus in retooling our regional focus and go after areas, such as food safety, environment and the expanding health care market, where we can actually achieve greater areas of growth.

Lastly, and certainly not least, is the support of Gilles' business, our SAFC Commercial business, and really focusing in on the Life Science products segment. We've been relatively successful with drug development, pharmaceutical and biotech companies in Asia. And whether it's our high-potency APIs or our bioplant [ph] products, we've been successful in the past.

We recognize and we've identified some areas that we believe we can bring more value to the market. And really, 3 simple needs that we've looked at are optimizing our product portfolio, localizing our technical support and really improving our overall service levels to these customers. And it's both multinational customers who are moving to Asia and the biosimilar companies who are emerging out of Asia. And we want to be able to support both of them. And some of the areas that we're working on, again, consistent with the customer intimacy and the top customer focus in SAFC Commercial, it's the focus on the right customers in Asia, the winners, and those that we can help to be winners; developing a more optimized media offering; and basically, for some of the biosimilar companies who don't have deep formulation libraries, is for us to have more off-the-shelf libraries that they can work with, and then in the future, optimize in order to improve their yields. And then lastly is really localizing our technical support, and this isto help in the areas of the media selection, media optimization and also in small-batch production of preclinical media for these companies, to help speed up their development time. So again, we believe that while we have been successful, there's even more ways that we can create more value for our customers in the market.

So just to transition and providing some guidance for our business, I thought it'd be interesting to show you we've got a very well-defined cadence over the year. And I think it's important to understand that we've got a lot of work to do, but we have things coming in throughout the course of this year that will help us continue, and keep on a positive growth profile for the rest -- the remainder of the year and also moving into 2014.

So in the past 2 years, we've had really good growth, 9% and 7%, respectively, above 5% in all of the business unit segments. But in the future, again for the first half of this year, we do see mid-single-digit growth, more in line with market. But as things begin to pick up and some of our programs begin to come in place [ph], we believe we'll be up at the high-single-digit growth area for the second half, and longer term, that's where we believe we'll be. And again, it's anchored in 3 key things: our local customer experience, having products for our local markets and really localizing both our operations and our technical support for the customers in the region.

Thank you very much.

Rakesh Sachdev

Thanks, Jason. So hopefully, these last few hours gave you a good appreciation of the richness of our business. I think we've tried to be a lot more granular about what we are doing and just the sheer diversity of our business and the different opportunities that we have around growth and our ability to focus on these 3 businesses. What you heard from Eric, what we have to do in Research and then all the excitement on the Commercial side, whether it's our large molecule work that we are doing on the biopharma side or the small molecules, as well as electronics side, and then what you heard from Frank, are really the -- some of the very neat stuff that we are beginning to do in the applied markets and it's only just the beginning. So -- and then finally, with Jason, you can see the passion that we have in Asia. I think we are on to something big. It's going to require a lot of hard work. I think I've said this before. We are only a few months into this new organization. It's going to take a little bit of time. But I'm very, very confident, and I know this team is feeling very good about where we're going to take the business.

So I know we are running a little early. We have a Q&A right now, so I'm going to ask the team, the presenters who've presented, to come down. What we'll do is do a Q&A for about 45 minutes, break at noon for lunch, then we can continue the discussion outside. So once again, thanks to all of you having taken the time to come here today. I don't know if we are also setting up some tours. Maybe if some of you who are here this afternoon will want see what's happening in the labs, I'm sure we'll be able to accommodate you. Thanks.

Question-and-Answer Session

Unknown Attendee

Rakesh, a couple, or Jan.

Unknown Executive

You might want to speak into the mic.

Unknown Attendee

So I have 2 questions, I guess. One, for the last number of years, you guys always talked about the fact that no one of your customers makes up more than 2% of your sales, which sounds very good, right, from a diversification of revenue standpoint. But does that mean also that, that -- is there an opportunity there -- I just wondered if you looked at the other side of it. Should it be that some of your customers should be way more than 2% of sales, given what it is that you provide for them? And then the second question I have is just more a little bit asking for a bit more color on the existing business. I think you called out in your presentation, sequestration as being an impact. But I hear you talk, it sounds like you're saying it's a little bit more number of days. But maybe you can just tell us exactly what you're seeing in terms of the impact from sequestration today, kind of if you're -- if it's more people getting laid off or this -- from what you're starting to see in terms of the impact of sequestration. And what gives you the confidence that the second half will improve?

Rakesh Sachdev

So our diversity on the customer base, that's true. I mean, there's no single customer that's more than about 2% of our business. I think with what we are doing on the Commercial side, especially working with some very large customers that Phil is working on, some of the leads that we have, I think it's all entirely possible that some of these customers will start becoming a fairly decent size of the business that we already [indiscernible] . Whether they'll actually get over 5%, probably not. But clearly, I think there are some large customers who give us a huge opportunity on this. I don't know, Gilles, if you want to add anymore to that.

Gilles A. Cottier

Yes, I can be more specific indiscernible]. I'll tell you, our plan is to, next 3 to 4 years, to have several customers that will represent between 3% and 4% of our business. You can make the math yourself. Absolutely. That's our plan.

Rakesh Sachdev

So when it comes to sequestration, I'll ask Eric to answer the question, too, but I think we have said all along that we have seen softness and sluggishness in the academic business. So I think what's happening in Q1 is really a couple of things, which is why, I think, Jan clarified that when she stood up here, is we acknowledge we have seen some softness in the academic side [ph]. Is it getting worse? Is it getting better? Are we seeing a trend? Not really. I think it's too early to see that. But we did have fewer days. And our business, where you're shipping daily a lot of reagents and consumables, when you have fewer days to ship, it does affect your business. I mean, if you just look at our Research and Applied businesses, where we have a cadence of shipments, we ship anywhere -- it could be $6 million, $7 million, $8 million a day on average, maybe more. And so when you lose a couple of days, you lose 2% or 3% of our organic growth, and I think that's what Jan said. Now we are losing that in Q1, but we are also picking it up in Q3. So it's just a point of clarification. But I think, coming back to sequestration, clearly the consumable side, as we talk to our customers in academia, while they have become cautious, I think they're probably a little less cautious on just the consumables. We don't see, right now, any retrenchments of researchers in academic labs. So that bodes well. I think part of the uncertainty in Washington has to clear up, and hopefully, the environment will get better. I don't see it getting worse. Hopefully, it's -- as we go through the rest of the year, that's going to get better [ph].

Steve Willoughby - Cleveland Research Company

Yes, Steve Willoughby at Cleveland Research. You guys are a couple of months into this kind of reorganization of your sales organization. Just wondering if you could tell us kind of what you found surprising so far, what's going well, what's maybe not going as well in the initial kind of rollout.

Rakesh Sachdev

Obviously, mapping our customer-facing organization to these new businesses, we have to take different capabilities. I think there are a lot of people who will be able to step easily into these different businesses that we have put them in. Frankly, we are also in the process of recruiting more talent as well. Especially, I think, when you look at Frank here in the Applied business, we have been hiring some very good people. And we'll probably continue to do that. That's part of the investment that we are making. I don't know if there are any surprises. I think, as Frank said, he gave you an indication, we have been working behind the scenes for over a year before we made this change. We had been starting this very carefully, thinking about the customers. We have engaged people on the outside. So when we rolled this out at the beginning of the year, we were, I think, fairly well prepared of what we needed to do in the organization. We didn't want to make the mistake of making an announcement and then trying to figure out. So we've spent a lot of time. I don't know if any of the folks here want to add something.

Franklin D. Wicks

Yes, I'll just make just a couple of comments. I wouldn't call it a surprise, but I think one of the things that -- one of the bigger challenges is that half of my organization, from a sales standpoint, came from SAFC, the other half came from Research. So either, depending on which half [ph], you didn't know how to do other half. It's a different order process, it's a different way to handle what needs to be done. But I think it was probably a little bit more complex than we thought. But definitely, it's the first quarter, I don't really think it impacted because we had a good hand-off between the organizations, in other words, working together with SAFC or the Research side to make sure no customer was just left, where we did hand-offs and working together to make sure it happened.

Eric M. Green

I'll add a comment with regards to Research, is we [indiscernible] that the organization is focused in academic or pharma would have better opportunities to identify these [ph] -- not just with one customer but multiple customers. That anticipation or that -- that the concept of having to be really dedicated to these customer segments is starting to reveal opportunities. So on the -- the positive outcome of this reorganization is that new avenues of growth are being presented, and we are able to formulate [indiscernible] have to go back to those customer segments with solutions. But I think it's taken -- to map all those customers to existing sales professionals around the world, and now the fact is we see more commonality with the reps here, focused on a particular segment.

Franklin D. Wicks

I just want to add another thing that I thought of, that I think the other thing that I've seen, probably this wasn't surprising, is just the energy that was created. And I think when you have change, you have 2 ways to go. People will either feel like it's a bad thing or they're worried about what's going to happen, or they're energized. So I think just the fact that I've seen the organization be energized, I think it's that they believe that we've a good plan. So I think that's another good thing.

Gilles A. Cottier

And then, the SAFC side [indiscernible] on the -- our Life Science franchise, service and then on the [indiscernible], there no change in the organization. But we see that going back [indiscernible] part of our business. The other thing I can tell you is on the Life Science services, especially for BioReliance, the only change that we saw is you add more salespeople across the portfolio of BioReliance. It started mid last year and some of the cost synergies that we shared with you from [ph] that. And on the Life Science products, again, just taking what Frank said what I already shared with you, is really we've been able [indiscernible] of our sales that is really, really important, very much, to servicing our value proposition.

Rakesh Sachdev

And the thing that I would also add is, we have taken this organization to all the regions around the world. So when you look at Europe -- and guys [ph] -- guys [ph] , why don't you just come down also because surely, lots of questions about Europe. We have organized Europe. We have a leader for the Industrial business for the first time in Europe, who's -- they're developing strategies of how to approach different Industrial Companies. We have got a dedicated organization for academia in Europe, trying to figure out what are the strategies and the value proposition for the big schools, the medium-sized schools. It's -- we are taking a completely different approach. Earlier, we had one sales organization, so I decide how they want to spend their time between academia, Research and SAFC, I think with that focus I think [indiscernible]. Sorry, you had a question?

Timothy C. Evans - Wells Fargo Securities, LLC, Research Division

Yes. It's Tim Evans with Wells Fargo Securities. So I realize you've chosen to give your long-term guidance as more of a qualitative -- in a qualitative way this year. But if I try to put some numbers around what you mean by low, mid or high single-digit growth and then multiply that out by percentage of businesses, I'm getting something like 3% to 6% growth on a consolidated basis in the long term. And that -- I guess is that the way you're looking at it, is the first part of the question. And second part is, that's kind of step down from what you were -- the 6% to 7% that we heard last year. So kind of what has changed about your view going forward?

Rakesh Sachdev

So I'd say 2 things when I -- when we think about long-term growth. One, clearly our mission is to perform better than the market. And so when you look at the back of the envelope math, you probably did, and look at where we think the markets are going to go and you look at the exposure we have to those markets, you're right. I mean, if you're going to do the math, it's somewhere around the 4% to 6%. So the question for us is how do we beat that market growth? And I think there are several reasons why I think I believe we will exceed market growth. Because when you look at our Commercial business for example, the end markets that we're playing in the Commercial business are growing faster than the average market. So when you take biological drugs, you take LEDs, take high-potency compounds, those are growing much higher than mid-single digits. So I think you have to look at what are the characteristics of the end markets that we are exposed to. Same thing on the applied markets. And I think that's -- and plus if you add the focus that we're just creating, as Frank said, we've been growing our Industrial and Applied business about mid-single digits without much of a focus. And you've got to bet that with everything that we are doing now and opening up solutions, that we should get more growth than what the market [indiscernible]. So are we changing our story? No, I think we're saying we are delivering the plan and going to execute on our plan that gives us growth more than market. Now the market has been -- obviously has headwinds, has tailwinds. And so we're realistic about that. So this year, as you can see, because of the uncertainty in some of the markets, there are certain segments that are going to grow much lower than the average. Yes?

Daniel L. Leonard - Leerink Swann LLC, Research Division

This is Dan Leonard from Leerink. A couple of questions on your 2013 guidance. You maintained the range. I'm wondering if the range now includes any more share repurchasing or cost reductions than your prior range did. And then secondly, on your assumption that the comparison to the pharmaceutical industry improved in the second half, how comfortable did you -- do you feel that, especially given that we saw an announcement from another large pharma company a couple of days ago for -- that includes R&D cuts?

Rakesh Sachdev

So to answer your first question, and maybe Jan can answer, we have not assumed more share repurchases to get to that EPS. It's -- we are still saying it'll be in that range, because as we sit here today, we still believe what we had planned for the year that we'd be able to manage. Of course, managing efficiencies and costs is something that, as a company, we have done well. We always look at that. We obviously don't want to do that at the expense of long-term growth. We have never done that. And if things get tough because of sequestration, maybe we'll be at a different end in that range. We still -- we have tried to keep that in mind as we reaffirmed that range. But there are some macro things that we don't control. So we'll see how that plays out. But as we sit today, that's what our thinking is. Jan, I don't know if you want to add something.

Jan A. Bertsch

Just on the portion of the customer [indiscernible]. At this point, we don't have any significant cost reduction actions planned for the year. However the company, as we normally have in the past, in the event that the economic environment gets much more pressure throughout the year, similar to what we did last year, we will have to take some select cost reduction actions and then slow down on some discretionary spending, things like that. So we'll keep our eye on those, as we always do in any environment, but nothing [indiscernible].

Rakesh Sachdev

Yes?

Rafael Tejada - BofA Merrill Lynch, Research Division

Rafael Tejada, Bank of America Merrill Lynch. I just had a couple of clarification questions on the Q -- for Q1, you're expecting flattish organic sales growth. I'm just wondering if you could give additional commentary on growth by business unit. And also, on the academic and government spend, just wondering if there was -- if the spend was more or less as expected on season. And last, just wondering if you could give an update on the SAGE animal models business and I have been hearing so much about that. I'm just wondering where you are and put them in the proper perspective.

Rakesh Sachdev

Do you want to take the first part, Jan?

And so I think as we've said, the flatness in Q1, as Jan said, is for -- maybe 3 or 4 reasons. Obviously, not to belabor the point about shipping days, but it is something that does affect our Research business and we have fewer days. That's obviously part of that. I think the Hitech business, again, as you know, last year, the prices were certainly high in that business, and they came down over the course of the year. So from a comp standpoint, Q1 takes the brunt of that. And the sequestration, I think the academic business is going to be somewhat softer. Is it going to be in the negative territory versus a year ago? It's hard to say. But it's going to be fairly flat. So those are the key reasons, I think, when we look at our Q1. Last year, Q1 was an incredibly strong quarter. I can tell you that if we just stay at the Q1 base that we have right now in terms of sales, from -- just from a comp standpoint, we'll show some good growth in the back half of the year. But obviously, we have all this time to do a lot more than just rely on the same runway.

So as to where we are on SAGE. I don't know if you want to say something. We are actually in the process of evaluating, and fairly advanced in that, in our thinking about how we want to have the SAGE business as part of our business. The SAGE business, for those of you who don't know, is a business where we have -- we deal with live animals. It's where we have a business of creating model rats. Clearly, that's going to be part of the business. We have always said that we're going to have to think about whether we want to be in that business as it grows, do we want to partner with somebody, do we want to divest that business, and that's part of the thinking that we are doing. Again, it's a very small piece of our business. Yes?

Joel Kaufman - Goldman Sachs Group Inc., Research Division

Joel Kaufman, Goldman Sachs. When we think back to -- during stimulus, when a bunch of life sciences companies were citing it as a tailwind, you guys consistently said that the impact was very minimal. Just trying to understand why you're now citing sequestration as a headwind. It sort of seems like the customer base would be the same there. Also wondering on priorities for M&A, are there any certain types -- certain parts of the business you're looking to focus on, tack on any assets? And then finally, managing currency on the P&L, just any update on your strategy there?

Rakesh Sachdev

So I think you're right. When the stimulation funding came, we saw some lift, but not the same as for many other companies who sell high ticket items. I would say -- even on the sequestration side, I would say that, clearly, I think the consumable businesses are going to be a lot less affected like we are. So I think you're going to see a much bigger impact on larger ticket-item companies. I think sequestration has probably caused a lot of our customers to be a little -- perhaps a little more cautious. But again, as we said, I think with the things that we're doing and with the collaborations we are driving with the universities, we're still funding and flowing into a lot of schools. And our plan is clearly to find where the money is going and making sure that we are right there and growing with those organizations. And with some of the schools that are facing a tougher time, we know that. It's -- we are going to see some decreases there, but that's the way it is. The other question about managing FX, I think you know that, if you've heard our calls, we started a currency hedging program late last year. I think Jan and her team have done an exceptional job. Maybe Jan should speak about it. I think our timing on some of the hedges has been very good. The Japanese yen has become incredibly weak. We have been doing some hedging on the Japanese yen. We've also done some hedging on the euro. So, Jan, I don't know if you want to say anymore on that?

Jan A. Bertsch

As a hedging strategy, we talk about it at every call and every single time[ph] . If I'm not mistaken, when we talked about it at the -- first at the year end call, the yen was probably close to $1.35 or something. And now it's today, it's $1.30. So it's just moving up and down, and we don't try to overreact too much in either direction. But our key currencies are clearly in the yen, the euro, [indiscernible] hedging some won, Korean won, Canadian dollar, things like that. So we're really focusing on our major currency exposures. I think at this time, we didn't really bring it up today only because -- well, the euro is in a less favorable position today than it was a month ago. I think [indiscernible] -- it's going to move up and down a little bit, and I don't think it's going to dramatically impact and [indiscernible]. So we'll obviously keep an eye on it all the time. Our hedging strategy allows us to hedge out a period of time, so [indiscernible] from now. So we'll continue to do that and continue to broaden the program. I think the third question was on the M&A strategy?

Rakesh Sachdev

Yes, you had a third question. Sorry.

Jan A. Bertsch

I think our M&A strategy is really largely unchanged from the last time we chatted about it. But with the new organization, the focus is certainly across the 3 businesses units and across the geographic regions as well. So we look at opportunities that span all of those. And the key for us is really that it meets our corporate strategy; that it allows us to enhance our growth, our profitable growth, that is inclusive of shareholder value, that it meets our strategy; and that it comes at a fair price. And so we -- and we'll continue to look at all avenues like that. I think, clearly, with the new organization, we have the capability and the focus really to look much deeper into places like the applied markets, where there's fairly [ph] some opportunities that I think interest us, and we'll continue to do.

Unknown Analyst

First, just a clarification on sequestration. In the past, you've framed out what exposure you have to NIH funding. But I'm wondering, have you seen sequestration spill over to the rest of your business? And then a follow-up on e-Commerce as well.

Rakesh Sachdev

Yes. So no, we have not seen sequestration really affect anything other than academia. And again, just to put this in perspective, I think Eric had a slide up there, some -- we have 25% of the Research business that is tied to U.S. academia and -- about 25%. So since Research is half the company, you could say that there's about 11% or 12% of our total company tied to U.S. academia. And then if you see how much is really affected by funding, out of that $11 million or $12 million of -- 11% or 12% of our business, it's somewhere around the 7%, 8%. And so you can do the math about -- if there is some headwind on that 7%, 8% of our business for [indiscernible]. Let me just finish. And for your -- the other question was on e-Commerce?

Unknown Analyst

Just some [ph] -- a few data [ph] for e-Commerce. And I think in the past, when you've talked about the margins, you've said the gross margin in e-Commerce was probably a bit higher than outside of e-Commerce. But operating margin, pretty similar given the investments you're making in e-Commerce. And I'm curious, with the investments you've got planned for near term, when should we expect the operating margin to start to [indiscernible] through at a higher rate for e-Commerce, and given it's such a big part of the company? I think...

Rakesh Sachdev

The margins on e-Commerce -- again, we have an efficiency factor. So to the extent that we have more business that we are conducting through the e-business channel, we have less people manning phones and factories [ph] . So we save some -- and over the years, we have reduced the number of people, the physical number of people who do that. I would say, the other thing is, from just a pricing standpoint, I mean, a lot of our prices are list prices on the e-channel. So to the extent that we can get more customers -- single customers who come to our e-channel to buy products [indiscernible] versus us doing business with large groups of companies, where we have to give discounts. So that also makes a slight improvement in [indiscernible]. But I think those are 2 big drivers. And every year, we have been growing our e-business channel by a couple of percent of our business, they're conducting through the e-business channels, both through e-business versus the traditional channel, and it helps us a little bit. We haven't really quantified that, but I would say it's giving us some benefit. It's probably not as big as you think. It comes over a long period of time. Yes?

Tracy Marshbanks - First Analysis Securities Corporation, Research Division

Tracy Marshbanks, First Analysis. I want to first commend you on the applied focus, and I'll do that by way of an example and then a question. So I served as a director on various private companies that are usually good Sigma customers, but they're going from research projects to commercial products, IVDs manufactured under GMP, and they start out with a research product, and in an IVD, we get enormous headaches as for manufacturing, quality changes, it's a plant extract. It's what the -- it's a friction for doing business and ramping up business. How might that situation be handled within the new context of the way you're focused?

Franklin D. Wicks

Yes. The critical thing there is actually having the face-to-face contact and understanding where they are in that process. So as early on as possible, we're going to identify when there are products that are headed towards Commercial. So a couple of years ago, we actually created a different, I'll call it quality system, where we have different quality levels. So as soon as we know that a product is headed that way, we try to see, in our internal way, can we elevate that to what we call an elite level or premium level. So it's really making sure we're close enough with the customers and know where that product is, where it is in the development cycle, and is this something we can actually deliver that type of response? So because we have so many different products, sometimes products are sourced from places that, let's just say, we don't -- can't give the guarantee. But we like to tell the customers quick as we can that, that's what stage [ph] is. But I would say the difference here is that we want to be able to understand that as early in the game as possible, and that's going to help much more for them, so they don't face those problems later on in commercial development.

Rakesh Sachdev

So I think that's a good question, Tracy. I mean, in some of the facilities that are shared between Research and SAFC, the ability to satisfy the quality standards for our research customers and our commercial customers are different, like he said. The commercial customers are looking for cGMP type of quality. The research quality standards are different, which is why we have put the entire quality focus now, a big part of the quality focus of this company, under the Commercial business and is port into SAFC. So we are taking a completely different view. So now, when our customers are coming to do audits of these shared facilities, they can see the SAFC-like qualities. And I think it's making a big difference.

Daniel Arias - UBS Investment Bank, Research Division

Dan Arias from UBS. A question for Gilles. Appreciate the comments on high-tech pricing. Wondering if you could just talk a little bit about volumes, how might volume on Q1 look relative to 4Q? And then how should we think about volume throughout the year? Should we think about sequential improvements from Q1 to Q4?

Gilles A. Cottier

It's just a value situation [ph] on [indiscernible] make sure that you understand. High tech [indiscernible] as Jan said about [indiscernible] I suppose of some of the question -- the question that you asked related to LED. LED is only a portion of [indiscernible] our business. [indiscernible] managing our business. And correct me if I'm wrong, but it's [indiscernible] about [indiscernible] half of our high-tech play. So the rest is our play in [indiscernible] and overperformance like [indiscernible]. So -- but to answer your question, how do you know specifically around the volume, I think volume has been increasing significantly last year. And as we're looking at [indiscernible] Q2 and Q3 going to evolve as we're [indiscernible] not as much as it did last year [indiscernible] and that's why we see that happening. And then as you say, the LED, seeing that's being, I would say, kind of cyclical on that. But long-term, okay, this business is going to grow [indiscernible] significantly. That's what we believe is going to happen, and -- as we see this price pressure on the LED, not on the semiconductor, I believe. We're also taking some initiatives to take our costs down, and we are and we will. As a matter fact, as the volume increases, we can probably utilize the plant that we acquired [ph] in Taiwan.

Rakesh Sachdev

Amit.

Amit Bhalla - Citigroup Inc, Research Division

Amit Bhalla from Citi. Jan, in your presentation, you outlined 4 specific operational excellence programs that are currently in play, and you've been executing on them. Could you talk to us about how much of a dollar or operating margin benefit you can still get from these programs?

Jan A. Bertsch

I can tell you, as long as this management team is here, we'll continue to work on improving our operating margin. I find that as the company grows, and not only in size but in geographic -- into the world, more opportunities start availing themselves. Because I think if we were to look to a few years ago, we would not have highlighted trying to optimize our freight strategy in the Asia-Pacific region as one of our key initiatives. So when I look at it today as we continue to grow our business and we have invested in and built facilities in China and in India, we have other facilities in the region starting to rethink the ways, not only that we move products from place to place, but how much level of inventory we keep, based on how our customers change over time and their needs. So we said that we're going to improve operating margins to the tune of about 0.5 point a year. This year, I would expect it to be a little bit less because -- not because we're going to generate more savings, but because I think it's prudent that we invest in these new -- in our new business structure in order to optimize our opportunities ahead of us. And we'll continue to look at things [ph] , including our working capital last year. I think we made some good progress in the latter part of the year, in U.S. and in Europe, related to some of our working capital. We have a lot of work to do on the inventory side yet, and that's the focus for this year. And it's difficult to give you a number, but I'd like to keep inventories relatively flat as we continue to grow the business, and achieve efficiencies that way as well. So we've got a lot of balls in the air now on this. So with the new organization, we're very focused on looking at half a dozen initiatives throughout this year and continuing to make progress on them. None of these happen overnight. This is a big company, it's got a lot of products and a lot of needs around the world. So -- but we're making progress little by little, and we're going to continue to do so.

Rakesh Sachdev

Yes.

Unknown Analyst

When talking about the first quarter, we spent a lot of time talking about the U.S. market. I'm wondering if you can give us any color on Q1 trends in Japan, given the cross currents there, as well as Europe?

Rakesh Sachdev

You want to -- Japan?

Jason Apter

I think our Q1 in Japan has been relatively flat year-over-year. And again, with the currency, we are seeing some increase in some of the export markets. But again, our business year-over-year is relatively flat.

Unknown Executive

Yes. In Europe, it's pretty much supports the overall corporate story as seen [indiscernible] dynamics for global business in Europe. The country is [indiscernible] levels as the economy's [indiscernible] are clearly there, the part we [ph] opened up opportunities. But [indiscernible].

Rakesh Sachdev

Yes. I would say, in Europe, I think we have seen similar things for us in academia. But pharma has been somewhat brighter in Europe for us, surprisingly. So we had a pretty decent start, even in the U.S. So as somebody asked the question, is the sequestration thing [indiscernible] But clearly, [indiscernible].

Unknown Analyst

I noticed in your Asia Pac, on the strategy that you had kind of going -- moving kind of into the value segment, can you talk -- there was recently a conference called FITCOM [ph], which is an analytical instruments conference, and there were probably 20 different companies there that were Shanghai something, in terms of new Asian competitors that were trying to get into in a market. Can you maybe just talk about what you're seeing through these lower, kind of more value segment, chemical-type products, what the competitive landscape is like there in China?

Jason Apter

If you break it down very simply, and that's how we showed in that Slide [indiscernible] opposite of [indiscernible]. And then at the bottom of this here, you've got a very low end segment, which is where traditionally a lot of the local and fragmented competitors play. But there's this emerging segment in the midrange, which is what we call the value segment, and these are some of the competitors locally, coming upstream, and hence the reason why we are moving downstream in that segment, where customers still want some reliability and a higher level of just the economy products but at that value segment [indiscernible].

Unknown Analyst

In terms of your growth outlook as you move from the sample perhaps of some of the detection analogy? You gave one example of a product that appeared to me to be more of an instrument almost of -- that you were selling? What's the desire, or the need, as you move into more detection, to move outside of just the kind of chemicals and reagents into more instruments?

Franklin D. Wicks

Yes. I'll just say that I think as we went through the strategic review and we looked at what the customers need, I think our main focus is going to be to provide that complete solution, and that may include instruments at some point. So I think we just will look at that, obviously just looking at the opportunities that are out there. But I think as we continue to want to build our capabilities, it's going to be focused on developing those assays. But I think it's something that's basically for the future growth that we can't ignore.

Rakesh Sachdev

I'll just add a little more color to that. I think when we talked about the applied [indiscernible] and in our applied market, which are fairly open systems, so there [ph] , if you look at the environmental market, investment [ph] space, those tend to be fairly open systems. So when I say open system, there's a room for a consumable and [indiscernible] supplier and there's a room for a platform. When you get to clinical diagnostics, it's a little different. A big part of that business is [indiscernible]. And so the opportunity on the clinical diagnostics for us, right now, at least for all the instruments, is to be a very niche player, which is what we are doing. There are some great niches. But on the other side, on the industrial and environment side, a big part of that is open. So when it comes to developing assays, kits, we can do all that. Now clearly, Frank and his group will continue to look at, as we think about the future, does it mean that we have to think about platforms differently? But that's one of the beauties of creating the organization that we have, because we are going to be a lot more strategic and thoughtful about what we have to do as we go. But for now, I think there's ample opportunity to do what we're doing [indiscernible] . Yes?

Unknown Analyst

[indiscernible]. I had a question about BioReliance. You mentioned headwinds that the business is facing. But now that you own the business for more than a year, can you talk about your -- or if you've seen any problems with integration or maybe any surprises integrating that business? And also, are you more confident in your ability to turn that business around? And what are the growth opportunities or growth expectations for that business going forward?

Rakesh Sachdev

I'd like to -- Gilles will answer, then I'll give you mine.

Gilles A. Cottier

[indiscernible] testing out of the ordinary in terms of the [indiscernible] said earlier. [indiscernible] they're strategy is as [ph] follows [ph] [indiscernible] product in terms -- we are researching. We have a very good market. As I said, also when I tried to mention it in the slides that I had there, we are looking at some -- we've already been realizing and [indiscernible]. But I can tell you, this has been [indiscernible] going to be gone [indiscernible] takes time. We are on zone [ph] cycle, customers, 25, and we are really focusing these efforts around some major customers, where we are leveraging the relative strength of each company, whether it's at the enterprise level [indiscernible] SAFC [indiscernible] where we have some of the nature [ph] relationship. But also the relationship that BioReliance has on [indiscernible] hedging [ph] services, and we don't do -- we don't supply [indiscernible]. So I think these efforts very focused, very concentrated. We have abilities [indiscernible], but it's a very, very targeted approach [indiscernible]. And then obviously, on the technology and all the things that we are also looking at, for instance, we are looking at BioReliance to help us enhance the quality outline [ph] . [indiscernible] to enhance quality of the raw materials that we are supplying to our customers [indiscernible] . So there's a lot of good things happening [indiscernible].

Rakesh Sachdev

So with 1 year under the belt, I guess I'm personally a little surprised, pleasantly surprised how strong technically BioReliance is. I think the piece that we are pushing now is the whole customer intimacy aspect of raising the dialogue that BioReliance and the SAFC being jointly are having with our very strategic customers. For a very science-based organization, sometimes that doesn't come naturally, and we saw that as an opportunity. And frankly, one of the reasons why Archie Cullen, who's going as President of BioReliance, is because he has led the entire sales and marketing effort for our licensed products group and has done a phenomenal job. And I think he'll bring the piece that I think BioReliance will benefit hugely from. So we're very excited about what, under the tent, what they have, and we know that the customers have a very high regard for BioReliance as they place -- they take a very important place in their quality and production systems. And so we just want to capitalize on that.

Unknown Analyst

Sigma is clearly in the midst of initiating or greatly expanding many customer relationships in a way -- the rate of change that didn't exist until recently. Can you make a prediction or an estimate about the customer life cycle, if you will? I mean, in the past, you had sort of a long steady state for established customers. How do you look at that now in the company's newer configuration?

Rakesh Sachdev

So again, when you look at the 3 businesses, the customer profile to those [ph] , if you look at the Commercial business, again as we've been saying, our business with large world-leading companies is growing. Our business is very sticky. When you look at the commercial business, once we get into the media business or we get into high-potency compounds, the life cycle is very, very long. It's very difficult to see a customer just changing because of a commercial parameter. That doesn't happen. On the Research side, we don't have any one very large customer. Hundreds and thousands of customers. And that business is also very sticky because we have a very broad portfolio, we have a fantastic brand franchise, and we are working hard. And we are -- we view our research customers in a different light than Gilles would as he looks at his commercial customers. But I would say, nothing changed in terms of the life cycle or the stickiness of most of our products that we have with our customers. We expect that to continue.

Unknown Analyst

[indiscernible] with your newer businesses, perhaps they're more subject to the vagaries of regulation or of changing technology, and I was wondering if those might have an affect, either positive or negative, on the stickiness that you talk about?

Rakesh Sachdev

So it's an interesting thing, if you look at the Sigma-Aldrich business, very little of what we do is -- gets affected by technology disruption. We do the basic building blocks. So when it comes to research, the kinds of products we produce, are fundamental for doing research about life or about materials. It isn't like somebody's going to develop a new iPhone. So from a technology disruption, there isn't something that we are just -- we are going to wake up and say that part of our portfolio is going to get affected. The same thing on the Commercial business. So that way, we feel very good with the business model that we have, and the diversity that we have is phenomenal.

Unknown Analyst

The LED precursor business, obviously, you and your competitors have grown a lot of capacity over the past 1.5 years or so. I'm just trying to understand what you've seen on the supply dynamics there, if people are continuing to bring on more capacity or that sort of stabilized?

Rakesh Sachdev

I think most of the capacity that we brought and some of our competitors brought happened really last year. I think there's probably sufficient capacity, at least for a period of time, which -- my prediction is that would probably bring more discipline around pricing as we get towards the later part of this year. But as Gilles said, I mean, this business is going to continue to grow. A few years ago, chemical precursors were the pacing item for production of LEDs. That's not the case today. But there will be a time again when the supply is going to be tight and there'll be decisions to be made by us and the other folks in the industry about the capacity they want to put in place. Again, remember there are only a handful of suppliers who are supplying the chemical precursors. I think there are only 4 or 5 companies in the world who do this.

Unknown Analyst

I just had another question on SAFC. You show a slide basically breaking out that 60% of sales are from biologics, 20% from small molecules, 20% from electronics. Wondering if you could comment on the margin profile of those 3 separate buckets, and wondering how you see that mix evolving over the next few years?

Gilles A. Cottier

We don't comment on [indiscernible]. I'm not going to give you idea [indiscernible] any color unto this, but I think that this business has been growing. It is [indiscernible] over the past 4 [ph] years. It has been going profitably. So we've been driving more EBITDA and more return on capital on this business over the past 4, 5 years, and we are looking to continue to do that as we finish [ph] the outlook [ph]. We have plans. 80% [ph] [indiscernible] we make. So if we plant our foot, we make good money. If we are not cool [ph] , it's going to be a challenge. So over the past several years, we've been able to drive the growth and the [indiscernible] that business. But I'm not going to give you any comment on specific plans and specific capabilities. It's a [indiscernible].

Unknown Analyst

[Audio Gap]

pharmaceutical company uses CROs as a headwind. I wondered if you could elaborate on that just a little bit? Is it -- is it that CROs do work more efficiently and, therefore, the market for your products grows slower? Or is it that they buy products differently [indiscernible] or something entirely different?

Rakesh Sachdev

I don't know how I said CROs are headwinds because we do a lot of business with CROs. And so pharma companies have, well, quite a bit of work through the CROs. Part of that has been in the emerging markets. I would say that we are -- and because of our first-mover advantage in places like China and India, we have done -- we have developed very strong ties with the CROs in that part of the world. Clearly, the CROs are under pressure too, because they are under pressure from pharma companies to operate a lot more efficiently and how they buy and how they do their work for them. And we understand that. But on the other hand, with our ability to now be more local, as Jason talked about, in these emerging markets, our plan is to continue to grow with them and continue to grow with the same, if not higher margin. One of the things that I have said in the past is that our profitability in the emerging markets is actually as good, if not better, than the rest of the world. So when we've grown the emerging markets, even today, that helps us also on the margin side.

So we'll take another one question, it's past noon, and then -- we are going to break, and we have tables there. We can continue to talk. So any last questions for Quintin?

Quintin J. Lai

Maybe that's the reason why we're in the [indiscernible]. All right, thank you [indiscernible]...

Rakesh Sachdev

Okay. Thanks a lot, and we'll see you for lunch.

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