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Sigma-Aldrich (NASDAQ:SIAL)

Q1 2011 Earnings Call

April 26, 2011 11:00 am ET

Executives

Rakesh Sachdev - Chief Executive Officer, President and Director

Kirk Richter - Interim Chief Financial Officer, Vice President and Treasurer

Analysts

Derik De Bruin - UBS Investment Bank

Summit Roshan - KeyBanc Capital Markets Inc.

Jonathan Groberg - Macquarie Research

John Roberts - Buckingham Research Group, Inc.

Quintin Lai - Robert W. Baird & Co. Incorporated

Paul Knight - Credit Agricole Securities (NYSE:USA) Inc.

Daniel Leonard - Leerink Swann LLC

Peter Lawson - Mizuho Securities USA Inc.

Isaac Ro - Goldman Sachs Group Inc.

Jon Wood - Jefferies & Company, Inc.

Dmitry Silversteyn - Longbow Research LLC

Tracy Marshbanks

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Sigma-Aldrich Corporation Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to your host, Kirk Richter, Vice President, Treasurer and Interim CFO. You may begin.

Kirk Richter

Thank you. And let me add my good morning and welcome to our first quarter 2011 earnings conference call. With me today is Rakesh Sachdev, our President and CEO. In today's call, I will review our first quarter performance. Rakesh will follow that with an update on the activities that contributed to our first quarter results, our outlook for all of 2011 and the activities that are expected to drive our performance. After completing those reviews, we will open up the call for your questions and comments. We will be using a slide presentation as part of today's call. That presentation can be viewed by accessing our Investor Relations website on sigma-aldrich.com.

Before beginning the review, I do need to remind you that today's comments will 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, 2010, and in the cautionary statement that is included in today's release and in our slides. We have no plans to update these forward-looking statements after this conference.

Also, we do provide information on non-GAAP financial measures covered in today's conference. That information, which consist of currency and acquisition-adjusted sales growth, operating income, net income and EPS results on both an adjusted and reported basis and free cash flow reconciled to net cash provided by operating activities, is also contained in today's earnings release, which is posted on our website and in the appendix to today's presentation that begins with Slide 12.

I am pleased to report that our sales, net income and diluted earnings per share for the first quarter of 2011 all set new quarterly records. Our Q1 sales were $632 million, a reported increase of 10% over last year's first quarter. Our organic sales growth, which excludes the impact of currency and acquisitions, was 7%, with contributions from both our SAFC and Research businesses. Acquisitions added 1%, and changes in foreign currency exchange rates added 2% for the increase in reported sales over the prior year.

Our first quarter net income of $119 million increased 19%. Reported diluted EPS was $0.97, a gain of 20% over the prior year. On a comparable basis, excluding restructuring charges and a tax benefit, net income and diluted EPS would have both increased by 12% over the prior year.

In the first quarter of 2011, we recognized a tax benefit of $5 million or $0.04 per share due to the release of some tax reserves. We also recorded restructuring charges of $2 million in 2011 or $0.01 per share and $4 million or $0.03 per share in 2010. These previously announced restructuring actions are intended to increase the efficiencies of our operations and lower our overall fixed cost structure. We expect to record additional cost of $4 million later in 2011 related to these actions. We expect that the benefit of this restructuring activity when fully implemented should add about $0.10 to our annual EPS beginning in 2012. Finally, while currency contributed to our sales growth, it had only a $0.01 impact on our diluted EPS.

Our Q1 free cash flow of $133 million equaled the amount generated in the first quarter of 2010 as higher net income was offset by a working capital increase to support sales growth in the faster-growing international markets.

Now let's review our sales performance for the first quarter in more detail. The 4% organic growth in our Research business met our expectations in the current market and was in line with our 2010 results. Pricing contributed a little over 1% of the overall organic growth in Research sales. Our recent acquisitions of Cerilliant Corporation and Resource Technology Corporation contributed approximately 2% of reported research sales growth and 1% of total company sales growth.

Our Q1 sales for SAFC set a new quarterly record of $180 million. This was a 16% organic increase over 2010's Q1. Strong sales of our Hitech products to the semiconductor and LED industries continued the momentum achieved later in 2010, driven by continuing demand for our LED precursors, especially in Asia, and by the strong Q1 performance of the broader semiconductor market.

Sales of industrial media to the biopharma industry had significant double-digit organic growth during the quarter compared to Q1 2010, driven by the continued strong demand by biopharma customers as sales of biological drugs continue to expand and accelerated buying in anticipation of a planned plant closure in addition to a weaker comparable in 2010's first quarter.

Our Supply Solutions business also attained mid-single-digit growth in all our geographic regions during the quarter. Sales for our Custom Pharmaceutical Manufacturing business were in line with 2010's first quarter as market conditions continue to be difficult for custom APIs.

Our reported operating margin of 26.4% of sales for Q1 was 70 basis points higher than last year's first quarter. Excluding restructuring cost of 0.5%, the operating margin in the first quarter of 2011 was 26.9%, roughly in line with the 26.7% adjusted operating margin that was achieved in the first quarter of 2010. Our margin increase this quarter came from slightly better SG&A leverage as we continue to spend our SG&A dollars in an efficient manner and lower restructuring cost.

In the first quarter, we did make additional investments amounting to $3 million and initiatives that are expected to drive future sales growth at above-market rates and in operational improvements including the recently opened European headquarters in Switzerland. We invested during the quarter in enhancing the quality of our overall cell program and expanded the animal model offering to include off-the-shelf models. We are also devoting additional resources to the development and commercialization of many of our platform technologies.

Our free cash flow for the first quarter of 2011 of $133 million was equal to what we reported in last year's first quarter. Higher net income in the first quarter of 2011 compared with the first quarter of 2010 was offset by an inventory increase that used $23 million of cash in this year's first quarter as we build our inventory largely to enhance service levels in the faster-growing markets in Asia-Pacific and Latin America.

Our capital expenditures in the first quarter of 2011 were consistent with our spending in 2010. We expect capital expenditures of approximately $120 million for the full year 2011 as we ramp up spending for an expanded distribution center in the U.S. and for investments in China, India and Taiwan to support our growing International Research business and strong demand for our SAFC Hitech products.

Now I'll ask Rakesh to comment on some of the operating highlights in our Q1 results as well as our 2011 forecast. Rakesh?

Rakesh Sachdev

Thanks, Kirk, and good morning to all of those who are on the call this morning. We are very pleased that we have started the year on a strong note with a record quarter for sales and earnings in our company's history. Before reviewing the quarter and our expectations for 2011, I wanted to once again outline our strategic priorities that we touched on at our last earnings call.

The first initiative is to enhance the growth in our Research and SAFC businesses. This includes an emphasis on the attractive Research segments of analytical chemistry, focused areas of biology such as biomolecules, genomics, proteomics and transgenics and areas of material science. We're also bullish about our growth and niche areas within our SAFC business such as metal organics for LEDs and semiconductors. In SAFC, we are also leveraging our unique manufacturing capabilities to grow our industrial media products, as well as our high potency products and vaccines for pharma and biopharma.

Emerging markets in Asia and Latin America are also important for us, and we continue to do well there. As a customer-driven company, we continue to enhance value for our customers by seeking ways to broaden our product and service offerings and delivering them with convenience.

On all these fronts, we are making additional investments and demonstrating solid progress. We expect the pace of these investments to increase through the balance of this year.

Our second initiative is to continue our focus on driving operational excellence through the fabric of the entire company. Our global supply chain initiatives are helping us not only to improve our manufacturing and distribution efficiencies, but they will also help us elevate service levels to our customers.

On our third initiative of leveraging our balance sheet and strong cash flow, we will be thoughtful but more aggressive in pursuing investment opportunities for both organic and inorganic growth.

In the first quarter, we acquired Resource Technology Corporation, which will add strength to our analytical product offering. We also invested cash and increased inventory levels in markets with strong growth potential. And we are now in an active investment phase in China, India and Taiwan. Additionally, we are returning more cash to our investors as we increase our quarterly cash dividend for 2011 by 12.5% over the 2010 level. In the first quarter, we also realigned our organizational structure and management team to support all these initiatives.

Now let me update you on our progress on our sales growth initiatives. Our expectation for long-term organic sales growth goal of 7% or higher is driven by innovation in the areas of our analytical chemistry, biology and material science, the anticipated expansion of our presence and footprint in emerging markets, achieving a larger percentage of our research sales through e-commerce channels, leveraging our distribution channels and leveraging our unique manufacturing capabilities and SAFC.

In 2011's first quarter, our performance in material science exceeded our expectations with strong double-digit growth. This growth came from both the academic and industrial customers outside of the U.S. We experienced strong demand for our mineral-sourced hard materials products, driven in part by improved research funding and alternative energy. Our analytical chemistry initiative continued to benefit from positive customer response to our new application in the environmental, food and beverage sectors.

In the biology area, we achieved reported growth of 6% and organic growth of 4%. This increase was largely driven by higher demand for our biomolecule products, including antibodies and our functional genomic products, including the expanded offering of our Zinc Finger nucleotide products. We now have over 40,000 antibodies in our Product portfolio, and we recently launched the Bioguarantee feature to guarantee 100% satisfaction for our customers' antibody purchases. This growth was offset by lower-than-expected demand for our custom oligos and protein acids. The shortfall in oligos is mainly in Europe as funding pressures and next-generation sequencing technologies impacted our product-based business.

Geographically, our North American sales growth exceeded our expectations as sales of the SAFC industrial cell culture media to the biopharma sector showed strong growth. Our European business had a strong quarter in research sales, even stronger than the U.S., but the SAFC Pharma business continued to be weak. We again experienced solid growth in the Asia-Pacific and Latin American markets with Q1 organic sales growth of 11%. In our focused markets of China, India and Brazil, combined first quarter organic sales growth was a strong 21%.

The natural disaster in Japan, which occurred towards the end of the first quarter, had less than a 2% impact on sales growth in that geographic region for the quarter. We're all very saddened by the devastation in Japan, but thankful that all of our 230 employees were unharmed, and our facilities had no damage. Our operations are back 100% online a few days after the event. Based on what we know today, we are expecting the impact of the earthquake and tsunami on our overall sales for the balance of the year to be small.

In addition to the 16% organic sales growth for SAFC in the first quarter, we are pleased that SAFC's booked orders for future delivery at the end of March 2011 reached a record level and were 5% above the March 31, 2010, levels since this is an indicator of future growth for that business.

One of the keys to our overall sales growth in the future is Internet superiority. Researchers' use of our e-commerce channels continued to grow, with first quarter sales via these channels increasing to 50% of our research sales, up from 49% in the fourth quarter of 2010 and up from 48% for the full year 2010.

Late in March, we announced a major improvement to our website to improve content search and navigation. And we also made significant strides to increase the ease of use and availability for our customers in Asia-Pacific and Latin America.

Now let me review examples of some of the progress we are making on growth initiatives in Research and SAFC. We are pleased that we have been able to acquire 2 companies that will increase our offering of analytical standards and attractive end markets. While these businesses are largely U.S.-focused today, we should be able to expand these innovative product offerings globally with our strong distribution and sales presence outside of the U.S.

Following the agreement we have had with the Michael J. Fox Foundation, we have now launched a suite of knockout rats to model Parkinson's disease. We use the CompoZr Zinc Finger Nuclease technology to create these models. These groundbreaking research tools are expected to help researchers accelerate investigation of novel therapeutic strategies for Parkinson's disease.

We now also offer predesigned CompoZr Knockout Zinc Finger Nucleases that can knock out any gene in the human genome. The new products, priced to make them accessible to a broader audience, can generate permanent gene knockouts in human cell lines within weeks. We also added over 10,000 MISSION Lenti GoClones to our offering. This unique target reporter system combines SwitchGear Genomics reporter assay expertise with our patented lentiviral technology to provide ready-to-use vectors that can enable scientist to understand gene regulation in a variety of cell types, including primary cells.

We have added 1,400 new European Collection of Cell Culture or ECACC cell lines to our collection of cell line cultures and services. These cell lines have been fully authenticated and tested for use in assessing the safety and efficacy of drug candidates and can be delivered within days to customers in the U.S., Mexico and Canada.

In the material science area, we have a new collaboration with Agfa Materials, a world-renowned imaging and information technology company to produce and distribute conductive polymers for use in high-technology applications, including organic portable types, touch screens and printed sensors.

In SAFC, we just completed construction of new industrial media capacity and have significantly enhanced the manufacturing technology and quality systems for media that is used to produce biological drugs.

In addition, we expanded capacity of our metal organic production in our existing facilities for the red hot LED market. We're also on the process of constructing new capacity for these products in Taiwan that is expected to come on stream by the first quarter of 2012.

In April, we also opened our European Regional Headquarters in St. Gallen, Switzerland to bring our European management team together at 1 site. This will enable stronger leadership and direction for major supply chains and sales functions. These are just a few examples of how our strategic priorities are moving forward.

Now let me review our 2011 output. I'm pleased to report that we have increased our outlook for adjusted diluted EPS for the year to a range of $3.60 to $3.75, up from our previous outlook of $3.45 to $3.60. This range excludes any restructuring or other extraordinary special charges. This increase was driven by our first quarter performance, expected changes in foreign currency exchange rates and the Q1 tax benefit. We now expect currency to increase diluted EPS over the prior year by about $0.05 to $0.10 compared to a largely neutral expectation in our earlier guidance.

Our sales forecast for mid-single-digit organic sales growth is unchanged from our previous outlook. We continue to expect similar market conditions as we saw in 2010. Our recent acquisitions, which increased our analytical product offerings, will also contribute a modest amount to the organic sales growth expectation. At current foreign currency exchange rates, currency is expected to increase reported sales growth by about 4% over the prior year. We are making additional investments this year in initiatives that are intended to drive future sales growth at above-market rates and in operational improvements. We expect to invest a total of $15 million to $20 million over that spent in 2010 or about $0.10 per share for those initiatives this year.

We expect to hold full year 2011 operating margins roughly in line with what we achieved in 2010 excluding restructuring costs, and our effective tax rate for 2011 is expected to be in the 29% to 30% range. This includes a benefit from the U.S. R&D tax credit and the tax benefit we received in the first quarter. That should enable us to report diluted adjusted EPS for 2011 in the range of $3.60 to $3.75. We've also increased outlook for free cash flow and expect it to now exceed $400 million, an increase of $25 million from our previous guidance due largely to our increased expectations for net income.

Let me assure you that our entire Sigma-Aldrich team is committed to achieving these results, and I look forward to updating you on our progress in our next conference call. I want to thank you for your support and ongoing interest in our company. So on behalf of the worldwide Sigma-Aldrich organization, I thank you for joining us today.

Now let's open up the call for your comments and questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Jon Groberg from Macquarie.

Jonathan Groberg - Macquarie Research

Thanks a million for taking the question. Just 2 quick questions if I can. The first, Rakesh, just on guidance, it's unclear. It looks like you really -- from an operating standpoint, aren't really changing much in terms of organic growth outlook and also your operating margin outlook. So is it primarily -- you said FX was $0.05 to $0.10, so is the rest coming just from a lower -- a slightly lower tax rate than you anticipated so far? I'm just trying to make sure I understand exactly the increasing guidance was driving on.

Rakesh Sachdev

Well, I think, clearly, we have performed quite well in Q1, so we had a real benefit from higher volumes in Q1. That's obviously in our total full year guidance. We are, as I said, going to expect some FX benefits based on where the euro is right now of somewhere in the $0.05 to $0.10. And we did get a tax benefit in Q1, too. So, I think, at this stage, what we are saying is we are tracking to the rest of the year. We had indicated that we will be making increased investments for our future growth, and we are committed to doing that, and so that's what's driving the guidance up.

Jonathan Groberg - Macquarie Research

But it sounded like relative to your expectations from a growth standpoint in the quarter and for the year, no major changes. So should we expect as we go throughout the year any kind of pickup in Research and SAFC, maybe slowing some or do you expect kind of a similar pattern to what you've seen in the first quarter?

Rakesh Sachdev

Obviously, I mean, Q1 was clearly very strong. We grew very nicely in SAFC, as well as Research was strong. We are still maintaining our full year guidance in terms of top line growth to mid-single digits. If we continue to see some strength in some of the areas there, then we'll come back and talk about whether we'll revise our top line outlook. As we sit now, the SAFC sales growth was strong, driven by biopharma. And some of that, we expect especially in the second half. The biopharma's growth may not be able to sustain that kind of steam, but we will see. Overall, I think we are very bullish about what's happening in SAFC and also feeling very encouraged about what is beginning to happen in Research especially in the Asia-Pacific markets but also with our initiative in analytical and materials science. We are surprising ourselves on the growth and the strength that we're seeing.

Jonathan Groberg - Macquarie Research

Okay, and just 1 more then on the free cash flow. Obviously, very strong free cash flow and guidance. Are you seeing any -- I guess how would you kind of describe the pipeline of acquisition opportunities that you're currently seeing and what you're evaluating?

Rakesh Sachdev

I think the pipeline is pretty good. We have a pipeline of several bolt-on companies that we're looking at. As you know, in the last 3 months, we have announced 2 acquisitions. We are actively looking at other bolt-on acquisitions. So, yes, so we have some great leads. As you know, a lot of these companies are private. They take the normal time for us to go through the process. But as I said, we are going to be thoughtful. We are very disciplined with the company when it comes to acquisitions. But we clearly see some opportunities out there. And as we bring them, we'll let you know.

Jonathan Groberg - Macquarie Research

Okay. Thanks a million.

Operator

And our next question comes from Derik De Bruin from UBS.

Derik De Bruin - UBS Investment Bank

So you mentioned that you had some orders that were coming in on the cell culture side that were -- came in ahead of some planned plant closures. Can you quantify what the impact was of that on the quarter?

Rakesh Sachdev

Well, again, what's happening is that we are actually moving some of the Industrial Media business into some of our new plants where we had put some new manufacturing technology. So there was a little bit of a pre-buy, not a whole lot. I would say that if I were to estimate the total impact of that, it will be somewhere around $5 million, $6 million.

Derik De Bruin - UBS Investment Bank

Okay.

Rakesh Sachdev

So that's it. It's fairly small.

Derik De Bruin - UBS Investment Bank

Great. And so you talked about having the booked orders for SAFC were up about 5%. Can you give -- can you quantify the mix on that just on what you're seeing in terms of Hitech versus cell culture versus just maybe the one that's going to appeal for that and I guess -- you don't report a straight book-to-bill number, but any color on what the…

Rakesh Sachdev

I would say it's fairly even. Clearly, where we're seeing the strength is between the media and Hitech. And I would say the growth is -- the booked orders are fairly even in terms of the strength between the 2.

Derik De Bruin - UBS Investment Bank

Great. And 1 final question, just to clarify on your guidance, does the guidance include or exclude the tax benefit from this quarter?

Kirk Richter

It includes that tax benefit, but it's a onetime and that it was also built into our expectation for the 29% to 30% effective tax rate for the full year.

Derik De Bruin - UBS Investment Bank

Okay. Thank you.

Operator

Our next question comes from Tracy Marshbanks from First Analysis.

Tracy Marshbanks

A couple of questions. On SAFC, you talked about the Cell Culture business and moving to new manufacturing and implementing new technology. Could you just touch on -- is the growth coming off of already commercialized products that are growing in the market or new projects you're getting and maybe just some aspects of the new technology and the benefits you can deliver to customers with it?

Rakesh Sachdev

Yes, clearly, the benefit is coming from both. And so it's coming from the new projects, and it's also coming from the existing drugs that are growing. And what I would tell you and I think I've mentioned this to several people is that over the next 5 years, if you look at the top blockbuster biological drugs, and there'll be probably 7, 8 of them of the top 10 the world will be biological drugs. And I would say that we'll be in most of them. So I think that's why we are so bullish because I think we are already finding our way into most of the blockbuster drugs of the future.

Tracy Marshbanks

And as far as the new technology benefits it's delivering, I mean, is it really cost or do you have some unique products...

Rakesh Sachdev

I think it's both. It's cost and quality. So I think we have changed some of the old manufacturing processes to some new equipment, which is going to give highly validated media for future drugs. And, in fact, what we have also done is, we have improved the operational efficiency of these new facilities, so we will see both, an improvement in the cost, improvement in the margins and improvement in our ability to go after drugs that require very, very high-quality standards.

Tracy Marshbanks

Final question, while they're small now, Cerilliant and Resource Tech has the promise to go global via your infrastructure. Is there anything that you need to get in place? Is just a matter of process and time here? When do you really think you can make sort of a worldwide offering available?

Rakesh Sachdev

I think it's a matter of process and time. It's not -- these products we can manufacture quite easily in our existing facilities. So either than that, we can manufacture it. I think our sales people are very excited in Europe and Asia because now they have a much greater product offering that we didn't have before we acquired these 2 companies. And so I think our guys are excited. They have to just take it and get it done now.

Tracy Marshbanks

So it's already in their hands to go sell at this point?

Rakesh Sachdev

Yes, so I think we've started seeing that happening. Even later in the second half of this year, we will start seeing some commercialization activity.

Tracy Marshbanks

Thanks very much.

Operator

Our next question comes from Dan Leonard from The Leerink Swann.

Daniel Leonard - Leerink Swann LLC

Thank you. First question, on the $0.10 in spending on strategic initiatives, can you remind me, is that -- are those onetime expenses or are those the kinds of expenses you would expect would recur annually?

Rakesh Sachdev

Well, I think last time, I said they were a combination of the 2. There are onetime expenses, but I think some of those are, frankly, we are investing and increasing our sales presence in certain markets like in Asia-Pacific and Latin America, which will stay in place, which should help us grow. We are investing in some specialists. We are investing in some R&D. But to the extent -- and also in e-commerce is the other area that we are investing now. Some of the e-commerce is going to be onetime because we are investing and revamping our content and search, and so we've got some consulting expenses that are going on as part of that and that will go away once we have finished the project.

Daniel Leonard - Leerink Swann LLC

Okay. And Rakesh, your commentary that foreign currency swings to a 4% positive on the top line and a $0.05 to $0.10 positive on the bottom line. Is that bottom line expectation, is that net of maybe additional spending on some projects you've greenlighted in light of the weaker U.S. dollar? And I ask because the margin implied on the dollar or foreign currency is a bit lower than we've seen in the past.

Kirk Richter

No. This is Kirk, and that's actually foreign currency standalone. So all the rest of the incremental spend, whether it's restructuring or strategic initiatives, was separately identified.

Daniel Leonard - Leerink Swann LLC

Okay. And then my final question, you mentioned in your prepared remarks that your oligo businesses was weak due to funding pressures on next-generation sequencing in Europe. What sort of visibility do you have that, that's actually the reason why the oligo business was down in Europe. It was next-generation sequencing pressure?

Rakesh Sachdev

Well, a lot of the projects that required oligos for doing the sequencing, some of those are coming to an end. We work with some institutions where we have had a pretty strong sales, and we've talked to them. So we see some of what I said around funding coming down is through conversations with our customers and client base. I think that gives some -- naturally, it's -- so we have been seeing this weakening trend in oligos for a while. I think it's beginning to stabilize to new level, but that's why we saw some weakness in Q1 as well.

Daniel Leonard - Leerink Swann LLC

Okay. Thank you.

Operator

Our next question comes from Isaac Ro from Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc.

Thanks for taking the question. First thing on just the SAFC business, you guys said that it was a record backlog, and I think 5% higher than the year ago quarter. And as we look back since the second quarter, I think, grew sequentially on a lower backlog. Is there any reason, I think, we shouldn't expect second quarter this year to do -- to have a similar result?

Rakesh Sachdev

I think the second quarter, we should expect to see double-digit growth in SAFC. I think getting to the 16% that we saw in Q1 is probably going to be -- we probably won't hit the 16%, but we should hit double-digit.

Isaac Ro - Goldman Sachs Group Inc.

Got it. And then maybe just -- okay. And then just switching over to specialties. Next couple of quarters, you guys, I think, have some tougher comps. And based on the growth you saw this quarter, are you confident you can kind of sustain that going throughout the course of this year?

Kirk Richter

Yes, we are.

Isaac Ro - Goldman Sachs Group Inc.

Okay, awesome. That's it for me. Thanks.

Rakesh Sachdev

Thanks.

Operator

Our next question comes from Quintin Lai from Robert W. Baird.

Quintin Lai - Robert W. Baird & Co. Incorporated

This quarter, there was a little news, kind of a noise coming from 1 manufacturer of LED lights and negatively pre-releasing, but it seems like that your business and demand continues to be strong. And then it sounds like that your visibility is even higher given the fact that you're expanding your manufacturing in Taiwan. Could you kind of elaborate on what you're seeing on this market now, Rakesh?

Rakesh Sachdev

Sure, Quintin. I mean, we work very closely with our customers in Asia-Pacific. And, in fact, what's happening is even since we made the decision to put the facility in Taiwan, several of our customers have come back to us and are asking for us to even absorb more capacity. So we have a very close dialogue with a number of Asian customers. We are being cautious on how much capacity we put. What I will say is that we have contractual agreements with our customers for a pay or take to taking this capacity. So while we are making these investments, we are fairly certain that we will sell this. And as I look at it, I think the balance of this year, this business is going to be very strong. And I expect the year-- couple of years to remain very strong. So no -- as of now, as we sit here, I think look pretty positive.

Quintin Lai - Robert W. Baird & Co. Incorporated

Thank you. Thank you for that extra color. And then again, from looking at the raised guidance here and you didn't make a mention of it, I just wanted to maybe get on your comments on are you seeing any inflationary pressures with your cost inputs?

Rakesh Sachdev

That's a very good question. I'm glad you asked. We are seeing inflationary pressure, and we have all said that in the past, when we've had that, we offset that through pricing. And we are assessing that situation. It isn't -- again, for a company like Sigma-Aldrich, the inflationary pressures probably don't have the same significance. Again, a lot of our input raw material is plant-based, animal-based, so the inflationary pressures don't really hit us that hard. Where the inflationary pressures do hit us on things like oil and freight, and so we are looking at -- and in Q1, it wasn't a whole lot, but we are clearly anticipating that the inflationary pressures will be higher towards the coming few quarters, and we will be prepared to offsetting that through recovering from our customers depending on how much that inflationary pressure is.

Quintin Lai - Robert W. Baird & Co. Incorporated

Thank you.

Operator

Our next question comes from Peter Lawson from Mizuho Securities U.S.A.

Peter Lawson - Mizuho Securities USA Inc.

Rakesh, the oligo weakness, was that the same customer as Q4?

Rakesh Sachdev

Yes, it was.

Peter Lawson - Mizuho Securities USA Inc.

And you think that's behind you now or is that continuing through...

Rakesh Sachdev

I think so. I think they're stabilized. Now we are growing the Oligo business in other parts of the world. As you know, we have, I think, a pretty strong Oligo business in Asia, and we have oligo facilities in Singapore, we have in Australia, with India, with Japan and, in fact, even post-tsunami, our Oligo business in Japan seems to be doing quite well. So while we have had some weakness in Europe, which is what I referred to, we are trying to make sure that as we look at this on a global basis, that we can still find ways to growing this business.

Peter Lawson - Mizuho Securities USA Inc.

And the LED business, how big is that?

Rakesh Sachdev

Well, our Hitech business is about -- today, it's about 5% or 6% of the total company sales. And that's mostly Organometallics. But that business, as I said, has been growing nicely. It's growing, I think, this past quarter, our Hitech business grew over 30%. But the LED business within our Hitech business is probably about 2/3 of that, is LED-related, if that helps you.

Peter Lawson - Mizuho Securities USA Inc.

Got you. I mean, that definitely helps. I'm just wondering if you could talk to the recruitment of a new CFO.

Rakesh Sachdev

Yes. So we've been in the process of looking at external and internal candidates. And I think we're making good progress. And so we are hoping that in the coming few weeks, we will bring that matter to a close and certainly let you know. I mean, in the meantime, Kirk Richter is very much here and very much in command of what's happening in the CFO world in our company. So we are pretty comfortable with the pace that we're moving at, and we'll have a proper transition with Kirk when that happens.

Peter Lawson - Mizuho Securities USA Inc.

Thank you so much.

Operator

Our next question comes from Paul Knight from CLSA.

Paul Knight - Credit Agricole Securities (USA) Inc.

And could you talk about when the -- is the distribution facility in Wuxi opening?

Rakesh Sachdev

Sure. So, in fact, I was in China about a month ago. And we've got a 6-acre campus in Wuxi. For those who don't know where Wuxi is, it's about an hour from Shanghai. And there's a lot of activity around construction. We are hoping to -- or we are planning to inaugurate that campus and that facility by September of this year so fairly quickly. And so we should be operational in Q4 of this year.

Paul Knight - Credit Agricole Securities (USA) Inc.

In September, you said?

Rakesh Sachdev

Yes.

Paul Knight - Credit Agricole Securities (USA) Inc.

And then on the Taiwan production, is this related to the economic cooperation that China and Taiwan are reaching on various product lines? Is it anticipation of that or is it...

Rakesh Sachdev

No. No, I don't think that has any bearing in our decision to put the plant in Taiwan. We have lots of customers in Taiwan, and we have customers in that region. And we think we can serve them quite well from Taiwan.

Paul Knight - Credit Agricole Securities (USA) Inc.

And you'll be able to export Taiwan into mainland China?

Rakesh Sachdev

Yes.

Paul Knight - Credit Agricole Securities (USA) Inc.

Easier or no different?

Rakesh Sachdev

No different. We'll be able to bring products into China from Taiwan.

Paul Knight - Credit Agricole Securities (USA) Inc.

Okay. Thanks.

Operator

Our next question comes from Jon Wood from Jefferies.

Jon Wood - Jefferies & Company, Inc.

Thanks a lot. So, Kirk, you mentioned the Research business price increases right over 1% in the quarter and kind of triangulating some of the raw material pressure Rakesh just mentioned. Should we expect that pricing benefit to kind of stay around that 1% level until you go into your September? I know you increase prices in September 30, I think. Is that when we would see any action on the raw material front?

Rakesh Sachdev

Yes. So Jon, as I've said, we are looking at pricing. And we normally go in September, but depending on what inflationary pressures we see, we may choose to again rethink through that timing, whether we might go even sooner than that.

Jon Wood - Jefferies & Company, Inc.

Okay, understood. On the acquisition front, so you guys kind of ended this quarter with the most conservative balance sheet, I think, in almost a decade. So kind of going back to your M&A comments, Rakesh, is the bolt-ons you're seeing, are they bigger in size than what you've done over the past quarter or 2? Or are there just more of them or should we not read kind of the increase in net cash position into your M&A view, if you will?

Rakesh Sachdev

Yes. I think the bolt-ons range all over the map from companies that have revenues of $5 million, $10 million to a company that have revenue of $100 million. And I would say that's kind of where the sweet spot of the bolt-ons are. And clearly, we are looking at the whole gamut, right? And we just have to -- you'll have to be a little bit more patient with us. We'll bring you, hopefully, some of these candidates, and we might do some slightly bigger transactions. It all depends on how strategic they are and if we can buy them for the right price and they add significant value for our shareholders.

Jon Wood - Jefferies & Company, Inc.

Okay, understood. Thanks a lot.

Operator

And our next question comes from Dmitry Silversteyn from Longbow Research.

Dmitry Silversteyn - Longbow Research LLC

A couple of things that I'd like to follow up on. Most of my questions here have been answered. On pricing that you got in the first quarter, you're talking about it being slightly -- or about 1% or so of the Research business. We've seen price realization for Sigma more in the 2% to 3% range, at least, in the longer-term trend line. Should we read into anything into the fact that you're only getting about 1% price increase? Is it becoming more difficult? Are you kind of running out of the price discrepancy areas where you can raise pricing without impacting demand? What's behind the lower pace of price realization?

Kirk Richter

I don't think it's really significantly different than what we've seen over the last couple of years, Dmitry. It's been in that 1.5% range. Been a long time since its been in that 2% to 3% range. And I don't think, looking forward, it should be anything significantly different than that.

Dmitry Silversteyn - Longbow Research LLC

So looking forward, Kirk, it sounds like we're safer modeling more like a 1% price realization?

Kirk Richter

Yes, slightly above that overall, but in the 1.5% to 2% range on Research.

Dmitry Silversteyn - Longbow Research LLC

Got it. Secondly, and Rakesh has addressed that somewhat, on SAFC, obviously, we're not going to see the mid-teens growth we saw this quarter because there it sounds like there was some onetime funds and maybe some pull-forward of demand. But you still expect to see double-digit growth for the rest of the year and that's primarily driven by the LED market or do you expect some recovery in the Pharma business?

Rakesh Sachdev

Well, let me clarify that, Dmitry. I think I said double-digit growth in the second quarter. I think the back half of the year, the comps are going to be a little tougher for SAFC because as you might recall that last year, the second half of SAFC was very, very strong. So it'll be somewhat less than what we have seen in the first half clearly for SAFC.

Dmitry Silversteyn - Longbow Research LLC

Okay. But getting back to my kind of the...

Rakesh Sachdev

But I would say, overall, the growth for SAFC for the year will be close to double digit.

Dmitry Silversteyn - Longbow Research LLC

But is it primarily driven by the LED market or do you expect some improvement in the pharma part of the business?

Rakesh Sachdev

I think there are 3 things that are driving the SAFC's strength. One is, the whole Bioscience Investors Media business that is very strong. The second one that we haven't talked about is our Supply Solutions business, which is selling raw materials for production and to the diagnostics industry and other place and that business has also been very strong and the third one, of course, is we have talked about a little bit this morning is our Hitech LED business. I would say all 3 are really contributing towards SAFC's growth

Dmitry Silversteyn - Longbow Research LLC

Okay. But you're not expecting any changes in those demand profiles? You're just looking at that more difficult comps in the second half of the year and take it...

Rakesh Sachdev

Yes. So we're not envisioning that the absolute sales of these business is going to change. It's just the comps might change because it's comparing to a prior period.

Dmitry Silversteyn - Longbow Research LLC

Got you. Okay, that's helpful. Then secondly, if I look at your guidance up about $0.15 or so, $0.05 to $0.10, as you said, was foreign-exchange remaining at these levels. You've got about $0.03 of the onetime tax benefit in there. So, overall, it looks like -- I don't know, maybe $0.08 to $0.10 is these onetime items or extraneous items beyond your control in terms of FX. The kind of the remaining $0.05 to $0.08, if you will, of the improved outlook, is that primarily related to the SAFC growth?

Rakesh Sachdev

No. I think it's related to both, SAFC as well as Research. It's primarily volume-driven. And, obviously, on the tax, the point I would make on tax we are still looking at the full year tax rate itself to be in the 29%, 30%. So even though we got some benefit in Q1 for the guidance purposes, it's still assuming a tax rate of about 29%, 30%, which is kind of what we had even going in. So when we look at the improvement we have made in our own minds, when we look at a $0.15 improvement and we are seeing that improvement is coming from -- some from FX and the rest from real improvements from operations and volumes.

Dmitry Silversteyn - Longbow Research LLC

I mean, the operational improvement is just a question of volumes, right, or is there some mix or raw materials? I mean, kind of what's driving the operational improvement versus your expectations 3 months ago?

Rakesh Sachdev

I would say volumes is the big driver.

Dmitry Silversteyn - Longbow Research LLC

Okay, okay. And then finally, Rakesh, just on this announcement you made a few weeks ago about consolidating research back under 1 head and under 1 organization.

Rakesh Sachdev

Right.

Dmitry Silversteyn - Longbow Research LLC

It took several years of moving it towards the greatest segmentation of Research that we've seen running biotech and small molecule research separately and then splitting small molecule research even further. So what has changed the market that you think that the new organization with 1 head and 1 policy or similar policy going forward is the better way of pursuing growth in biotech and in some of the other niche applications that you're trying to grow in?

Rakesh Sachdev

Sure, let me say a couple of things on that. First of all, within the Research business, which is now under 1 umbrella, we still have very focused efforts on the major different areas. So, we have a whole group on analytical chemistry. We still preserve the group of biology. We have chemistry. We have material science. I think what had happened is, we had created the Research Biotech business, but we also had a very large Biology business under our Research Specialties business, and what was happening is, we had two Biology businesses sitting in different business units. Now with Frank Wicks running that, we have put that as 1 Biology business. We have some real synergies between those 2, but we are not losing the focus, clearly. And we will still report out to you how we are doing in the different business. And I think we are now going to be a lot more coordinated. We now have Dave Smoller, who is our Chief Scientific Officer, who is focusing on emerging technologies. So, I think just from a coordination standpoint, less confusion with customers, all that has been very, very positive.

Dmitry Silversteyn - Longbow Research LLC

Okay then. Thank you.

Operator

Our next question comes from Summit Roshan from KeyBanc Capital.

Summit Roshan - KeyBanc Capital Markets Inc.

Thanks for taking my questions. On your guidance, you cited a more favorable FX, $0.05 to $0.10 is what you'd mentioned earlier. How much of that came in the first quarter?

Rakesh Sachdev

Well, we said in the first quarter, we only got $0.01. Yes.

Summit Roshan - KeyBanc Capital Markets Inc.

Okay, you got $0.01 in 1 quarter. And on the new products and new product expansions, it sounded like you have a lot of that come on in the quarter as a percentage of, say, sales growth. Could you give us an idea of what new products contributed?

Kirk Richter

Yes, I think if we look at it over a longer period, the new products in any 1 quarter aren't individually significant. What we want to show is that we do this each and every quarter with new ideas. So, if you look at it, and we tend to look at products over a 5-year cycle, that gave us between 15% and 20% of our sales.

Summit Roshan - KeyBanc Capital Markets Inc.

Great. Thank you.

Operator

[Operator Instructions] Our next question comes from John Roberts from Buckingham Research.

John Roberts - Buckingham Research Group, Inc.

You mentioned that you started selling off-the-shelf animals. I know the Animal Model business is still small, but could you maybe talk about the longer-term ambitions there? I remember once upon a time, Genencor, which was owned by Eastman, had a Mouse business and so forth and it didn't go so well for them. So where are we going?

Rakesh Sachdev

Well, let me just kind of go back and talk about sort of what we are doing. We have a proprietary technology called the Zinc Finger Nuclease Technology and that technology allows us to create diseased cells. It allows us to create diseased animals all that is used for research by researchers. Now we are selling cell line, so we will create customized diseased cell lines for researchers using the Zinc Finger Technology. We do the same thing with animals. So, we use the Zinc Finger Technology to create diseased rats, whether they have Parkinson's or have certain type of cancers, Alzheimer’s. When we entered this business, we were thinking that we would -- the Zinc Finger would really be the Intel Inside. So, think about the Intel Inside as the Zinc Finger and the package around that instead of the PCs as the rat or the mouse. And so we were creating customized animals, and we are doing that quite successfully. The question then has been is sort of as we create going to sort of standard rats, will we breed animals when we do the cleaning of cages and so on. And what I would say is that, we are right now exploring our own options, whether we're going to do that ourselves, or we're going to partner with somebody who will do that as long as we maintain the technology and the Intel Inside. So that's what I would say is -- and that's working well for us. We are not in the business today of breeding large colonies of animals and cleaning cages.

John Roberts - Buckingham Research Group, Inc.

But wouldn't you capture the vast majority of the value-added by out-licensing the cell line to someone else to actually grow the animals?

Rakesh Sachdev

Well, again, I would say that we are looking at several options. And so I would sort of reserve my comments until we have actually decided which way we are going. And once we have that, we will announce the way we are heading.

John Roberts - Buckingham Research Group, Inc.

Okay. Thank you.

Operator

I'm showing no further questions and would like to turn the call back over to management.

Kirk Richter

Okay, we certainly want to thank everybody for their participation today. We look forward, we do expect to release results for the second quarter of 2011 before the market opens on July 26. And we'll follow that with a conference call the same day again at 10:00 Central Time. That concludes today's conference.

Operator

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.

Rakesh Sachdev

Thanks.

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