Sigma-Aldrich,'s CEO Discusses Q2 2011 Results - Earnings Call, Jul 26, 2011 Transcript

Sigma-Aldrich, (NASDAQ:SIAL)

Q2 2011 Earnings Call, Jul 26, 2011

July 26, 2011 11:00 am ET

Executives

Rakesh Sachdev - Chief Executive Officer, President and Director

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

Analysts

S. Brandon Couillard - Jefferies & Company, Inc., Research Division

Jonathan P. Groberg - Macquarie Research

Daniel Arias - UBS Investment Bank, Research Division

Tracy Marshbanks - First Analysis Securities Corporation, Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

John E. Roberts - Buckingham Research Group, Inc.

Peter Lawson - Mizuho Securities USA Inc., Research Division

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

Daniel L. Leonard - Leerink Swann LLC, Research Division

Jonathan Palmer - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Dmitry Silversteyn - Longbow Research LLC

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Sigma-Aldrich Corp. Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn your conference over to your host for today, Mr. Kirk Richter. Mr. Richter, you may begin.

Kirk A. Richter

Thank you, and also, let me say good morning and welcome you to our second quarter earnings conference call. I am the Vice President, Treasurer and Interim Chief Financial Officer. And with me today is Rakesh Sachdev, our President and CEO.

In today's call, I will review our second quarter performance, Rakesh will then follow that with a discussion on the activities that contributed to our second quarter results and our outlook for all of 2011. After completing those reviews, we'll 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 at www.sigmaaldrich.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, 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 consists of currency and acquisition-adjusted sales growth, operating income and related margins, 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 13.

Our Q2 sales were $637 million, a reported increase of 15% over last year's second quarter and a new quarterly high. Our organic sales growth, which excludes the impact of currency and acquisitions, was 6%, right in line with our full year 2011 expectation for mid-single digit organic sales growth. Both our SAFC and Research businesses contributed to this growth. Acquisitions added another 1% and changes in foreign currency exchange rates added 8% to the overall increase in reported sales over the prior year.

Our second quarter net income of $113 million is a 17% increase over last year's second quarter. Reported diluted EPS was $0.91, a gain of 15% over the prior year. On a comparable basis, excluding restructuring charges, adjusted net income of $115 million and adjusted diluted EPS of $0.93 would have increased by 16% and 15%, respectively, over the 2010 levels.

In the second quarter of 2011, we recorded restructuring charges of $2 million or $0.02 per share, the same amounts as last year. The restructuring actions, which began late in 2009, are intended to increase the efficiencies of our operations and lower our overall fixed cost structure. We expect to record another $3 million in expenses for these actions later in 2011.

As a result of these restructuring actions, our EPS is expected to benefit by about $0.10 annualized with most of it beginning in 2012. Our Q2 free cash flow of $77 million equaled the amount generated in the second quarter of 2010, consistent with our first quarter results. Higher net income was offset by a working capital increase to support sales growth in select markets and to enhance customer service.

Looking now at our first half results for 2011. Our sales grew organically by 7%. In addition to growing our top line, we are pleased with a double-digit growth in earnings. Our adjusted net income of $236 million and adjusted diluted EPS of $1.90 each achieved mid-teen growth on both the reported and adjusted basis. Free cash flow remained consistent with 2010 at a healthy $210 million with the increased net income offset by working capital increases just as I described for Q2.

Now let's review our sales performance for the second quarter and first half of 2011 in more detail. The 4% organic growth in Q2 for our Research business matched our Q1 performance and met our expectations in the current market environment. Our Research sales in the U.S. and Europe grew organically in the low to mid-single digits, while our Asia Pacific and Latin American business continued to grow near double digits. Rakesh will comment more on our sales growth shortly.

Our recent acquisitions of Vetec, Resource Technology Corporation and Cerilliant contributed approximately 2%, and currency added 8% to the reported Research sales growth. Our Q2 sales for SAFC set a new quarterly record of $183 million. This was a 10% organic increase over 2010's Q2, but down from the 16% organic growth we reported in Q1. As we mentioned in the Q1 conference call, while we expect sales of our SAFC business to remain strong for the remainder of the year, we do expect to report lower organic sales growth in the second half of the year as a result of tougher comps against the very strong sales performance of SAFC in the second half of 2010.

Strong sales of our high-tech products to the semiconductor and LED industries continued the momentum achieved in Q1, driven by continuing demand for our LED precursors, especially in Asia.

Sales of industrial media to the biopharma industry have significant double-digit organic growth during the quarter compared to Q2 2010. This growth was driven by the continued strong demand by biopharma customers as sales of biological drugs continued to expand.

Our Supply Solutions business also achieved high single-digit growth in the U.S. and in Europe, and double-digit growth in Asia Pacific and Latin America during the quarter.

Sales for our Custom Pharmaceutical Manufacturing business were less than 2010 second quarter as market conditions continue to be difficult for custom APIs. Organic sales growth in the first half of 2011 was 4% for Research and 13% for SAFC, resulting in a 7% company-wide organic growth rate. A 1% benefit from acquisitions and 5% from favorable changes in foreign currency exchange rates drove reported growth for the first half to 13%. These results were consistent with our expectations for Research and reflect the strong performance in SAFC in Q1 and Q2. We believe that we can continue to have positive momentum in sales as we implement the strategic initiatives that Rakesh will review shortly.

On a constant-currency basis and after removing the effects of restructuring cost and the higher incremental amortization associated with our recent acquisitions, our adjusted operating income margin in the second quarter was 26.3% or a 10-basis point improvement over 2010. This improvement included an additional expense of $3 million or 50 basis points as a percentage of sales for strategic growth initiatives.

As previously mentioned, our free cash flow for the first half of 2011 of $210 million was equal to the amount reported in the same period of 2010. Higher net income in the first half of 2011 compared to the first half of 2010 was offset by working capital increases that used $57 million of cash. This cash usage was largely due to higher accounts receivable levels, as well as higher inventory levels to enhance service in the faster growing markets in Asia Pacific and Latin America and other select markets.

Our capital expenditures in the first half of 2011 were $44 million, slightly higher than 2010. We expect capital expenditures of approximately $120 million for full year 2011 compared to $99 million for all of 2010. We are making investments in the high-growth, emerging markets of China, India and Taiwan to support our growing Research business and to meet the strong demand for our SAFC high-tech products.

Now I'll ask Rakesh to comment on some of the operating highlights in Q2, as well as the reaffirmation of our 2011 forecast. Rakesh?

Rakesh Sachdev

Thanks, Kirk, and good morning to everybody. Before covering some of the second quarter details, I would like to review briefly our strategic priorities and provide context for our second quarter progress. Growth is an important strategic imperative for the company, and we are driving this on several fronts.

In the Research business, we are focused on innovation and product leadership in the faster growing segments of analytical chemistry, select areas of biology and materials science. Additionally, we are focused on expanding our product breadth, customer service and distribution capabilities to deliver greater convenience to research customers for our core products, including our chemistry and biochemistry reagents, lab essential products and labware. In our SAFC business, we are driving growth in the areas of cell culture media for biological drugs, chemical views and electronic applications such as for the manufacture and development of LEDs, semiconductors and solar panels. We are also leveraging our unique manufacturing capabilities to provide custom APIs, vaccines and fermentation products to the pharma industry. And finally, we are growing our Supply Solutions business in SAFC, where we provide raw materials for several industries such as diagnostics, food and beverage, pharma, to name just a few.

The emerging markets have been and are clearly going to be strong markets for us to drive organic growth in Research and our SAFC businesses. Additionally, our e-Commerce platform is a very important channel to our markets and provides unsurpassed convenience and service through best-in-class content and search tools. We have a strong balance sheet, and we intend to deploy our capital structure to complement our organic growth through selective acquisitions.

Since last December, we have invested about $150 million and 3 bolt-on acquisitions. Our second quarter and year-to-date organic sales growth of 6% and 7%, respectively, reflect both the success of the individual research initiatives and the strong growth in SAFC. Our analytical chemistry initiative continue to benefit from positive customer response to our new applications in the environmental and food and beverage sectors.

We are capitalizing on our increased presence in the analytical standard markets from our recent acquisitions in that space, which added about 12% growth for analytical in the quarter. In the biology area, we achieved reported growth of 13% and organic growth of 5%, reflecting improved demand in this area compared to the organic growth of 4% in the first quarter. This increase was largely driven by higher demand for our biomolecules products, including antibodies and our functional Genomics products, including the expanding offering of our Zinc Finger Nucleotide products. Our performance in materials science products for research continue to exceed our expectations with high single-digit organic growth. This growth came from the U.S. and international markets outside of Europe.

We experienced strong demand for our mineral source hard materials products driven in part by improved research funding and alternative energy. We continue to experience robust growth in SAFC sales in the second quarter. Strong demand for our industrial media products used in the production of biological drugs continues to be a strong performer for our SAFC business. We also saw our high-tech business continue to do well in the quarter as strong demand from materials and precursors for use in semiconductor and light emitting diode applications continue to positively affect this business with double-digit growth compared to 2010. We expect this to continue through the remaining quarters of 2011.

We're also pleased with the growth in our Supply Solution business, which saw high single-digit growth to diagnostic and pharmaceutical customers in all geographic regions. In addition to the 10% organic sales growth for SAFC in the second quarter and 13% for the first half, we are pleased that SAFC's booked orders for future delivery at the end of June reached another record level and were 4% above the June 30, 2010, level. This is an indicator of future growth for that business.

Even though the strong third and fourth quarters of 2010 will moderate growth comparisons for the balance of the year in SAFC, we continue to expect high single-digit sales growth for the full year.

Geographically, our North American sales growth of 6% exceeded our expectations as sales of the SAFC industrial cell culture media to the biopharma sector showed strong growth as its sales in the high-tech markets. North America also had a 3% lift above and beyond organic growth from our recent acquisitions in the analytical space.

Sales growth in the second quarter in our European business was negatively affected as sales to a large customer in the Middle East, which is included in our European sales, was lower this quarter than a year ago. Additionally, we saw a small impact from restructuring at some of the pharma customers in Europe.

Our international region, which includes Asia Pacific and Latin America, had strong organic sales growth of 12%. In our focus markets of China, India and Brazil, combined second quarter organic sales growth was 20%, and with the acquisition of Vetec, adding another 7%, our focus markets grew by 27%.

One of the continuing keys to our overall sales growth in the future is Internet superiority. We continue to make our site more user-friendly, using greater feedback from customers and finding ways to make their work more efficient. During the second quarter of 2011, we had 11.4 million visits to our website compared to 9.6 million in the second quarter of 2010 or a 19% increase.

In the second quarter, the percentage of research sales through the electronic commerce channels remained at about 50%, the same rate we achieved in the first quarter. We are expecting additional growth from the addition of new products from our acquired businesses to our e-Commerce platform in the future.

Now let me highlight a few specifics achieved on our strategic initiatives in the second quarter. We completed the acquisition of Vetec located in Rio in Brazil in late May. Vetec is the largest domestic manufacturer and distributor of chemical reagents in Brazil. This purchase doubles our market share in Brazil, adds more than 3,000 products and approximately 300 employees. Most importantly, it adds a platform for us to execute our local supply chain strategy by providing all aspects of manufacturing, quality control, packaging and distribution at a high quality facility in Brazil.

The integration of Vetec, Cerilliant and RTC are on schedule, and the businesses are all delivering as expected. We had several activities in the life science space during the quarters that reflect our ongoing commitment to our platform technologies. In Zinc Finger Nucleus, we added custom and catalog -based engineered cell lines to our offering. As an example, we now have cell lines available for breast cancer research.

We also began selling off-the-shelf transgenic Rats in the second quarter. Additionally, we capitalized on the ZFN technology by licensing it for spider cell production.

In our chemistry initiative, we are seeing some exciting applications with our stable isotope products. For example, our isotopes are now being used in breath tests for diagnosing stomach ulcers.

In the second quarter, in our materials science initiative, we agreed to collaborate on the scale up and commercialization of next-generation hydrogen storage materials. We believe this collaboration will further the development of a vital component for consumer-friendly hydrogen storage materials for fuel cells and clean combustion technology. Our expansion in Wuxi, China should be online in the fourth quarter of 2011, and they should give us the capability to package and distribute more competitively priced products for the local Chinese markets.

In India, we have just completed the expansion of our Bangalore packaging and distribution center. This 57,000 square-foot expansion, which includes packaging operations for the first time in this country, enables us to enhance service levels for the local and regional markets and provides us a cost-competitive facility for other regions of the globe. These newly installed operations complement the long-standing manufacturing capabilities we have had in India. These are just a few examples of our strategic activities.

Now let me review our 2011 outlook. Our sales forecast for the mid-single digit organic sales growth is unchanged from our previous guidance. We continue to expect market conditions to remains similar to those we experienced in 2010 and the first half of 2011. Our recent acquisitions are expected to contribute about 2% to the full year organic sales growth expectation. And at current exchange rates, currency is expected to increase the reported sales growth by about 5% over the prior year.

We have reaffirmed our outlook for adjusted diluted earnings per share for the year to a range of $3.60 to $3.75. This range excludes any restructuring or other special charges. We expect currency to increase diluted EPS over the prior year by $0.10 to $0.15 at the end June 2011 exchange rates. This is up slightly from our last outlook. However, we are experiencing higher inflationary cost pressures in material, and we expect that through the pricing actions and the slight benefit in FX to largely offset these costs.

We are making additional investments this year both in initiatives that are intended to drive future sales growth and operational improvements. We expect the investments to be $15 million to $20 million more than we spent in 2010 or about $0.10 per share. Our effective tax rate for 2011 is expected to be in the 29% to 30% range. And this includes a benefit from the U.S. R&D tax credit in 2011 and the benefit we received in the first quarter resulting from the release in tax results.

We reiterate our expectations to report diluted adjusted EPS for 2011 in a range of $3.60 to $3.75. And we expect free cash flow to exceed $400 million this year. Let me assure you that our entire Sigma-Aldrich team is committed to achieving these strong results, and I look forward to updating you on our progress in the next conference call. I want to thank you for your support and ongoing interest in our company. And 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] Our first question comes from the line of Jon Groberg from Macquarie.

Jonathan P. Groberg - Macquarie Research

Just 2 questions. The first question. I don't think you actually gave a number for Europe. Could you maybe just tell us what Europe grew there and maybe expand a little bit in terms of the impact you saw from pharma? And then the second question is -- looks like you're getting a bit more benefit from FX, but you didn't change your guidance, and I think you said that was cost inflation. If you could just maybe expand a little bit more on the added cost inflation that you're seeing.

Rakesh Sachdev

Sure. Jon, good morning. Yes, was -- Europe, actually, grew about 2% organically this quarter. And as I said, we were negatively affected. We had a large business last year with the Middle Eastern customer that probably affected about 1%, 1%, 1.5%. The research business in SAFC both grew about the same in Europe. I would say that where we are seeing some pressure in Europe and we saw that in Q2 was in academia, we were flat to slightly down, but the other businesses were pretty consistent with what we have seen in the past. The U.S. clearly grew more than Europe in the second quarter and, of course, Asia Pacific and Latin America are all growing very, very strongly. In terms of the FX impact, you're right. I mean, we do expect a slightly higher impact in FX for the full year. We have seen some inflations, especially in freight costs with what's been happening with oil and some are solvent production. So we are going to use that to offset that. We of course, we're also going to have our normal pricing actions cover that. So overall, I think between the FX and some of the cost inflation, we're still holding that we'll be whole. And if, for some reason, we can bring that to the bottom line, we will sort of give you further guidance as we go forward.

Operator

Our next question comes from the line of Tracy Marshbanks of First Analysis.

Tracy Marshbanks - First Analysis Securities Corporation, Research Division

Couple of questions. A little bit related to maybe to the first. Others have been out talking about impact of worldwide austerity programs. Not that it's taking away growth, but it's blunting what they thought was possible. If you just sort of look at that broadly, what is your sense of the market impact, and more importantly the impact on you, if any?

Rakesh Sachdev

Yes. So, Tracy, I think as you look at the macro picture, I think if you look at the last few months, what we are seeing is that the business with that -- generally, the demand in academia and government research labs has been fairly flat. But when we look at our other end markets like biotech, diagnostics, especially the industrial markets and the chemical industry, those have been still growing quite nicely. So I think where we are seeing some slowdown is really in the academia sector, which is not a surprise. And more of that is, as I just mentioned previously, is in Europe. Our academia business is still growing nicely in the international markets. And it's probably growing in the low-single digits in the U.S. And it has been growing a little more, so I think some of that is playing out. But again, it's too early for us to see if there's really a trend. As I said, most of our other markets, including pharma, we have actually grown quite nicely.

Tracy Marshbanks - First Analysis Securities Corporation, Research Division

All right. Maybe just a quick update on the CFO search and what our timeline is? Is it still the same?

Rakesh Sachdev

Yes. Kirk Richter is doing a great job for us. And I think I've mentioned that he intends to be here through the latter part of this year. We will be finalizing the CFO announcement fairly shortly. And I think we will be probably prepared to make an announcement in the coming few months.

Operator

Our next question comes from the line of Peter Lawson from Mizuho U.S.A.

Peter Lawson - Mizuho Securities USA Inc., Research Division

Rakesh, I wonder if you could just elaborate upon pharma, what's happening in Europe versus U.S. versus the rest of the world and the outlook.

Rakesh Sachdev

Yes, so I think if you break pharma out for us and our Fine Chemicals business and our Research business, I think what you would see is that clearly, both through pharma and biopharma, our sales and from our SAFC businesses has been very robust, very strong. It's just the uniqueness of what we do with them. If you look at the Research business with pharma, again, it's been fairly flat. It's been growing in the low-single digits, and which is not unexpected especially in the U.S. and Europe. But we've been recipients of some benefit in the emerging markets because pharma has moved either -- doing more work with CROs, so they have their own capital center, so they're benefiting from that. I would say Europe is where we are using the most weakness in pharma because there's been a lot of restructuring. As you know, some of the large pharma companies have shut down several of their research centers, and they're moving to work outside. So I would say that's kind of where we are seeing some of the pressure in pharma.

Peter Lawson - Mizuho Securities USA Inc., Research Division

And then just on your Internet initiative. What percentage of sales come from the Internet versus the catalog? And are those sales or those customers just as sticky as the catalog sales?

Kirk A. Richter

On the percentage of research sales, it's at 50%. As we said in the call, that's consistent with what we saw in the first quarter. We haven't been able to add our new acquisitions to the site, so we're getting a little bit of a misleading indicator there, but we intend to add those to the site. In terms of the cost, there's a fair amount of infrastructure that supports that website. Not only is it the cost of the site itself, but it's got the SAP backbone which supports that. So there's not much difference between a traditional sale and a e-Commerce type sales.

Daniel L. Leonard - Leerink Swann LLC, Research Division

And are those customers just sticky as the catalog?

Rakesh Sachdev

Absolutely, yes.

Operator

Our next question comes from the line of Quintin Lai from Robert W. Baird.

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

Again, kind of going back to the academic and pharma, the academic demand. The other companies that have reported just recently talked about softening. But it seems like that perhaps maybe there's a correlation between instrument-heavy companies and a consumable-based company like yours. As you're looking at, kind of, your daily sales, as you went to the end of the quarter, did you see any slowdown at all or is it pretty steady through the quarter?

Kirk A. Richter

I think what we saw is not only was it steady through the quarter, but the second quarter was generally pretty consistent with the first quarter, except for what Rakesh mentioned earlier about that one special order in Europe. Other than that, the 2 quarters were pretty much the same as well.

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

Interesting, interesting. And then, I guess, with respect to potential M&A going forward. Rakesh, what are you seeing with respect to the environment out there? Are there still lots of opportunities for you to do tuck-in acquisitions or -- just any color would be great.

Rakesh Sachdev

Yes, I mean, absolutely. As you know, Quintin, we have done a few acquisitions here. I would say that over the last few months, we have clearly seen a lot more activity in terms of the M&A market in our space. But a lot of companies who are either considering for -- doing something. And we just have a lot more in the pipeline. Our pipeline is quite full. We are evaluating, I would say, at any given time, at least a dozen opportunities. But these take time because a lot of these are bolt-on acquisitions. And sometimes, it's a private company that require some extended discussions, but I would say that there are opportunities out there. We are fairly disciplined buyers. We want to make sure we are buying for the right reason, and we have first a strategic context. But, yes, we see opportunities out there. Now we have to pace ourselves to make sure that as we keep buying, making acquisitions, that we integrate them properly and make sure that they're delivering on our commitments that we make to our shareholders.

Operator

Our next question comes from the line of Isaac Ro of Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Rakesh, first off, I just wanted to just on your outlook for the SAFC high-tech business. It does seem to be there's a softening CapEx environment for the semiconductor sector heading into next year. Wondering what your forward-looking outlook is for that part of your business.

Rakesh Sachdev

Yes, we haven't -- again, a lot of the work that we do in the semiconductors is really for the development. And it's -- unlike in the LEDs where it's sort of manufactured. So first of all, I would say a bigger part of our high-tech business is clearly exposed to the LED business. And that business, as you know, is still very, very robust. And I think I mentioned the last time we are expanding our operations in Asia. And by the way, we are expanding these operations based on supply agreements that we are putting in place with our customers, so we're not just making investments without commitment from our customers. I think on the semiconductors side, the same thing. I think they are very actively engaged with semiconductor companies and the development of new products. And we haven't seen any slowdown in that part of the business yet.

Isaac Ro - Goldman Sachs Group Inc., Research Division

And then maybe, Kirk, a follow up on the numbers. Just given that you guys run a little bit longer in your inventories versus the peer group in tools. Can you maybe remind us how we should think about FX impacting gross margins in the back half of the year?

Kirk A. Richter

I think what we said is we've actually upped that guidance. In the prior quarter we said we thought it was $0.05 to $0.10 advantage, now we're saying it's $0.10 to $0.15 for the full year. But as Rakesh commented earlier, there's some other offsets thus maintaining our guidance at $3.60 to $3.75 level.

Rakesh Sachdev

Yes, but to answer your question about just the FX impact on the margins. As you know, in the first half and this quarter, we had dampening of our margins because of FX. I think -- understand, we have some currencies that are clearly helping us like the Euro, but then we have some other currencies that are offsetting that like the Swiss franc because we do have several large operations in Switzerland. So that gives a little bit of a headwind there. But overall, I think FX is still going to be in an absolute basis a positive to our results, but probably a slight headwind on the margins.

Operator

Our next question comes from the line of John Roberts from Buckingham Research.

John E. Roberts - Buckingham Research Group, Inc.

What's the split between the U.S. and the International for online sales now? The U.S. has been historically much higher than the International.

Rakesh Sachdev

Yes. U.S. has been closer to about 60%, and I think International is coming up. I think there's disparity between the countries in the International. We have just finished the translation of our website in Japan. We are doing that in several other countries. I don't have the exact number with me here what the International business is but I think it's probably in the maybe around 40% or so.

Kirk A. Richter

Yes, something like that.

John E. Roberts - Buckingham Research Group, Inc.

And then this may be a crazy question, but do you think any of the federal government labs will put in any austerity plans over the next week or so in anticipation of maybe delayed payments or some sort of disruption short term from the government situation we've got here?

Rakesh Sachdev

Your guess is probably as good as ours. It will be very unlikely, but there's nothing that -- there's no rounding the [indiscernible] Kirk, anything?

Kirk A. Richter

No.

Operator

Our next question comes from the line of Dmitry Silversteyn from Longbow Research.

Dmitry Silversteyn - Longbow Research LLC

A couple of questions since most of mine have been answered and they tend to be a little bit longer term. But on a shorter-term question, Rakesh, you talked about the raw material headwind being offset by the better foreign exchange contribution than you expected. But you also talked about some pricing initiatives in the second half of the year. Can you talk about what you're doing differently now versus your pricing initiatives previously? And what kind of a level of pricing do you expect to achieve in 2011?

Rakesh Sachdev

Yes. So on pricing, I think we're doing what we have done historically. We did pull forward the pricing. We actually went with a pricing action in June. But really, most of that benefit would really come in the second half of the year because we started seeing sometime in Q2 some -- the material inflation, especially on petroleum products and also freight, so we acted on that. We typically grow -- do a pricing increase around the August, September timeframe. So that should help us mitigate or in fact eliminate the impact of the cost increases. And that's what we have done on the price.

Dmitry Silversteyn - Longbow Research LLC

So you're basically looking at -- so you got the pricing into the market earlier than you normally would, and you're hoping that that's going to maybe add 50 basis points, too?

Rakesh Sachdev

Well, I mean, pricing typically gives us a couple of percent, but I would say that we will probably end up using quite a bit of that to offset the material cost inflation.

Dmitry Silversteyn - Longbow Research LLC

Got it, got it, okay. My second question is on the cash use. I mean you've flirted around with being cash positive, now you're clearly cash positive here. You haven't done any share repurchases. There was a little bit of a share creep this quarter, as a matter fact. Can talk about cash use outside of M&A? Obviously, M&A is going to be consuming some of that, but what is it, the 3 deals that you've done were about $50 million worth. So clearly, not of the magnitude that would meaningfully impact your cash position. So what's your outlook like around rating dividends or increasing the pace of share repurchase? Or how do you intend to deploy this cash flow for shareholders benefit?

Kirk A. Richter

I don't think our strategy is going to change significantly. M&A is still the primary focus on share repurchases, it's largely to offset the dilution from our equity award programs. And then I expect, barring any major change that would make dividends more favorable, we'll keep it at that roughly 20% payout ratio.

Rakesh Sachdev

And just also, I think maybe I heard you say $50 million, but we've invested $150 million in the last 6 months in acquisitions, and expect that we will do some of those. And as Kirk said, we will look at share buybacks, and we don't rule out the possibility if the timing is right and the opportunity and we have excess cash, but we would do those appropriately.

Dmitry Silversteyn - Longbow Research LLC

In that case, let me follow up. Outside of lightning striking and you having an opportunity to do a $2 billion acquisition. How do you -- I'm assuming you're not particularly happy with your capital structure here being net cash position. How do you intend to address that or rectify the capital structure going forward?

Rakesh Sachdev

I would say acquisitions and share buybacks. So I think just play around on those 2 fronts.

Dmitry Silversteyn - Longbow Research LLC

I understand that Rakesh, but my point is you've been doing that as part of corporate policy for a while, and your cash position continues to grow. So I mean it's -- obviously what you're doing is not enough to get to a more reasonable capital structure. So I'm just trying to think if you -- or trying to explore you're looking at something outside the box or you're just going to resign yourself to carrying a cash balance.

Rakesh Sachdev

I've made a couple of statements. One, I think as you know, most of our cash is outside the U.S. So if you were to do a very significant share buyback, we would probably have to leverage our balance sheet. We prefer to leverage the balance sheet to making sizable acquisitions. But that's where the cash is. I think the second thing is as we look at acquisitions, we are looking at -- we look at acquisitions small and large, and we're just working through that as part of our strategic process.

Dmitry Silversteyn - Longbow Research LLC

Okay, I understand. All right and final question. You've delivered mid single-digit growth here in the first half of the year organically. Sounds like that level of growth is going to be sustained through 2011 assuming market conditions stay where they are. It's hard to argue with this type of growth given how difficult the situation is out there, but at what point do you see yourself -- or where does the market have to improve either regionally or through market sectors like pharma or academic research or chemical and high-tech? In other words, what market conditions should we look for, for you to be able to get to your 7% to 8% organic growth target?

Rakesh Sachdev

Well, I think if you look at where we are growing, if you look at emerging markets, which is becoming a more meaningful part of our business, and we are getting double-digit growth there, so I think it's going to have a bigger impact in the future. I think if you look at the focus that we have now put on the faster growing markets within research, and I've talked about analytical chemistry, and I also talked about certain areas of materials science, we clearly see the opportunities to grow there in the double digits. I think where we'll have to sort of work on sort of different fronts is our core chemistry and biochemistry business, we understand that. But we're driving convenience. We are using our e-Commerce channels. We are using our distribution capabilities to drive our sales there. If you look at the first half of this year, our organic growth has been 7%. And if you look -- so it's not far from what we have said. And we will just continue to drive there.

Dmitry Silversteyn - Longbow Research LLC

So if I hear what you're saying, it sounds like your ability to get to 7% to 8% from this point forward is more a function of your internal execution and initiatives than it is of end markets improving.

Rakesh Sachdev

Well, I mean end markets always have an influence, to the extent that the end markets don't move. And they haven't traditionally moved too much on us. I think the light there, of course, is down the road is our sales key business, certain parts of our SAFC business have some cyclicality. Again, I think we are very pleased with the focus that we have in our SAFC business because we have actually chosen to play in niches within SAFC that have a long-term growing trend. But there are some pieces of that business that are cyclical. So every quarter is not going to be exactly the same. As we said in the second half of this year, we are probably going to show a lower organic growth rate in our SAFC business because of the comp versus the second half of 2010. Now the absolute sales of SAFC are just going to remain strong maybe even get stronger comes maybe a little bit different.

Operator

Our next question comes from the line of Dan Arias from UBS.

Daniel Arias - UBS Investment Bank, Research Division

Rakesh, within sales of the industrial cell culture market, that's obviously been pretty solid for several quarters now. How much visibility within that market would you say you have right now? Do you feel pretty good about demand there beyond, say, 6 months or so?

Rakesh Sachdev

Yes, I think so. I think we work very closely with the biotech industries, and we are working with them at different stages of the evolution of these biological drugs. I would say that we feel pretty good that in a few years, when 8 of the top 10 drug -- I'm sorry, if that 8 out of the top 10 selling drugs in the world are going to be biological drugs, I think we have visibility that we've probably be specced in at least 5 or 6 of them. And so we are working closely with the biopharma industry. And their developments, we have some -- or obviously, they share with us, kind of, where the trends are. And so far we are feeling pretty good.

Daniel Arias - UBS Investment Bank, Research Division

And then I appreciate the comments on the gross margins, and I apologize if I missed this, but do you still see operating margins flat year-over-year after excluding the restructuring?

Rakesh Sachdev

Yes, I mean given that we are spending more on some of our strategic initiatives this year. And if you take out the effect of FX and restructuring, I think year-over-year will be fairly, I would say, fairly equivalent to last year. Obviously FX is the wildcard depending on what happens to the FX. It could go up or down.

Daniel Arias - UBS Investment Bank, Research Division

And then just one quick one. How did the OE go and the protein assay businesses do this quarter?

Rakesh Sachdev

I think the [indiscernible] business was up this quarter. I'm sorry I can't you tell you exactly how much it was up, but it was -- it did grow this quarter.

Operator

Our next question comes from the line of Paul Knight from CLSA.

Jonathan Palmer - Credit Agricole Securities (USA) Inc., Research Division

This is Jonathan Palmer in for Paul Knight. I was wondering -- could you tell us how long does it take to work through the SAFC backlog? Is that a quarter, 2 quarters?

Kirk A. Richter

Yes, I think generally, that represents between a 3- to 6-month backlog. And that's not on the Supply Solutions business, which is roughly 40%. Most of that's in our other areas of the Custom Pharma and the high-tech business.

Jonathan Palmer - Credit Agricole Securities (USA) Inc., Research Division

That's pretty helpful. And then just wondering about the growth rate in emerging markets in Asia. Is there any significant difference between SAFC and the Research business in those...

Rakesh Sachdev

I mean, I would say that the Research business probably is growing right now in the emerging markets in the low-double digits. And the SAFC business is probably growing closer to 20%. And the reason the SAFC business is growing quite healthily in the emerging markets is because of the high-tech business, which tends to be most of the electronics business is in Asia.

Jonathan Palmer - Credit Agricole Securities (USA) Inc., Research Division

Of course. And you've spent some time on the call talking about emerging markets in, and you've done the Vetec deal in Brazil. Can you maybe just quantify how big of addressable market that is, and what kind of customers you serve there?

Rakesh Sachdev

So again, we sell all the traditional customers. We have been in Brazil quite strong in the academic markets and the government institution markets. Vetec actually brings a couple of different end markets for us, which is very exciting. They are very, very strong. And the industrial markets, and so, they're going to complement each other quite a lot on the customer side, as well as on the product side. I mean the total addressable market, as I said, the Vetec business practically doubles our business in Brazil. And I think we're going to see a lot of synergies as well because we will also have available now some very neat[ph] products out of Brazil, which will give us an opportunity to bring some of those products out of Brazil into the other parts of the world as well.

Operator

Our next question comes from the line of Jon Wood from Jefferies & Company.

S. Brandon Couillard - Jefferies & Company, Inc., Research Division

This is for Brandon Couillard in for Jon this morning. Kirk, in terms of the inventory build in the second quarter, should we expect that niche to moderate in the second half? And do you feel you're adequately stocked in those emerging markets at this point?

Kirk A. Richter

I think that was one initiative we were going to carry on throughout the year, so we expect for the full year that our inventory months on hand would go up slightly. And no, that isn't going to abate in the second half with a strong growth that we're continuing to see in those markets particularly in the 3 focus markets where we are up 20%. We have found that there's a good correlation between increasing the service level and continuing to sustain those kind of growth levels. So now we're not going to hold back at all.

S. Brandon Couillard - Jefferies & Company, Inc., Research Division

And then just so I'm clear on the pricing, as I understand, you pulled forward the typical annual pricing you take in September to -- in June, that's not an incremental off cycle price increase, if I understand that correctly. And is it higher than you would normally take on an annual basis given the inflationary pressures or was it consistent with, I guess, prior years?

Rakesh Sachdev

I would say it's fairly consistent. Again, this is -- when we look at pricing, we look at those products which are more prone to material inflation. And so we adjust prices accordingly, so especially products which have more petroleum content. We have adjusted probably prices higher than we have in the past. But on the others, we may have not. We may have kept about the same. So I would say we would still expect above 2%, 2.5% price increase. And as I said we will probably use a lot of that for offsetting material inflation.

S. Brandon Couillard - Jefferies & Company, Inc., Research Division

And then one last one. Kirk, what was the amortization expense in the second quarter? And do you have an updated outlook for the full year?

Kirk A. Richter

I think, the -- I don't have the second quarter in front of me. The amortization -- depreciation and amortization looks like it's up about 10% from what it was a year ago. It will be slightly higher and the components will change as we sort out the various pieces particularly on the VTEC one that we just finished up. It won't grow significantly more than that, but it will be up slightly higher in the second quarter because of Vetec.

Operator

[Operator Instructions] Our next question comes from the line of Mike Sison from KeyBanc.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

In terms of SAFC, you've had 2 years now of very strong growth. How sustainable do you think or maybe help us understand, maybe it's -- the market certainly haven't grown to that significant level, but why do you think that's sustainable the next several quarters and the next couple of years -- because there's been very strong growth there.

Rakesh Sachdev

I really don't look at the underlying growth where we are getting it from, and that's SAFC. That's important. Because I think if you just say, high-level Fine Chemicals it's sometimes difficult to understand. But if you look at our -- let me break the SAFC business for you. 15% of the SAFC business is high-tech. And as I said, the high-tech business is really riding on the coat tails of a trend that we are seeing on LEDs, which is really going. We don't see that over the next few years of abating. So I think again that's on the trend. Then we have our industrial media business, which is about close to 25% to 30% of the SAFC business. And as I just mentioned, biological drugs are on a growth trend. And so again we have hung on to coat tails of a trend. So if you look at the Bioscience business, which is about 30% high-tech, which is about 15%. That's 45% of our business that is actually riding on some good trends. The other 40% of the business is our Supply Solutions business. And the Supply Solutions business is a very interesting business. Again, it's providing raw materials for diagnostics, food and beverage. It's really leveraging our research assets, and the reason we are successful is because of our ability to maintain the quality standards for a lot of these products. And that business I think as a steady growth. Now it's not going to grow like high-tech or industrial media business, but that business has been growing in the mid- to slightly high mid- single digits this year, and we continue to see that. I think the wildcard in our SAFC business is our Custom Pharma business, which is only about 15% of the whole SAFC business, where we sell APIs and vaccines. And that is more prone to some of the macro issues that pharma and biopharma are seeing. So granted we have a small portion of the SAFC business that we're very watchful of what's happening. But again there also, we have chosen to be a very niche supplier of custom APIs largely and certain fermentation products. So that's been our strategy in SAFC, and I think that's going to help us going forward.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

In terms of acquisitions and high-tech, there's a pretty big industry out there for semiconductor materials and chemicals. Is that an area that there could be good fits for you guys down the road? And maybe -- or areas that are maybe not bolt-on but maybe newer?

Rakesh Sachdev

That could be a part of materials science. A lot of work we do in high-tech which is SAFC, but there's the similar kind of science that we use for products that we sell in our research areas. So when we look at acquisitions that cover materials science and some of the high-tech offshoots, yes, we are. So as I was mentioning earlier, we do have a pipeline, and there are companies that would give us perhaps an expanded reach in some of the materials science and high-tech products as well.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

And last question in Research Biotech. There is a time when the growth potential there was expected to mirror SAFC, I know that's come down a little bit. But any chance over the next couple of years that business can get -- could sort of mirror what SAFC is doing in terms of growth?

Rakesh Sachdev

So, again, it's very much like the story I said about the emerging markets. As the faster growing segments of our Biology business become more meaningful, I think it will create more growth for the biology sector. If you look at within our Biology business, I would say about 20%, 25% of the business is very fast growing, the other businesses that we have invested. So when you look at Genomics, you look at Biomolecules, a lot of these fast-growing businesses are growing 15%, 20% a year. But again, we still do have a lot of our BioBasics business that grows more in the low-single digits. And so, yes, I'm not concerned. I think as we grow these businesses, they will become more important pieces of our business.

Operator

And with no further questions in queue, I'd like to turn the conference back over to management for any closing remarks.

Kirk A. Richter

So we certainly want to thank everybody for their participation today. Looking forward, we expect to release results for the third quarter of 2011 before the market opens on October 25. And we'll follow that with a conference call that same day at 10:00 a.m. Central Time. That concludes today's conference.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. And you may all disconnect. Have a great rest of the day.

Rakesh Sachdev

Thank you.

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