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Sigma-Aldrich (NASDAQ:SIAL)

Q4 2011 Earnings Call

February 09, 2012 11:00 am ET

Executives

Sondra Brown -

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

Rakesh Sachdev - Chief Executive Officer, President and Director

Analysts

Isaac Ro - Goldman Sachs Group Inc., Research Division

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

Derik De Bruin - BofA Merrill Lynch, Research Division

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Jonathan P. Groberg - Macquarie Research

Daniel L. Leonard - Leerink Swann LLC, Research Division

Peter Lawson - Mizuho Securities USA Inc., Research Division

Tracy Marshbanks - First Analysis Securities Corporation, Research Division

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter Sigma-Aldrich Corporation Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host, Sondra Brown, Director of Investor Relations. Please go ahead.

Sondra Brown

Good morning, and welcome to Sigma-Aldrich's Fourth Quarter 2011 Earnings Conference Call. This is Sondra Brown, Director Investor Relations. With me today are Rakesh Sachdev, our President and CEO; and Kirk Richter, our Vice President, Treasurer and Interim Chief Financial Officer. In today's call, Kirk will lead off with a review of our fourth quarter performance. Rakesh will follow that discussion with an update on the activities that contributed to our fourth quarter results and our outlook for 2012. After completing these 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 at our Investor Relations website at www.sigmaaldrich.com.

Before beginning the review, I want to remind you that today's comments include forward-looking statements about future activities and our expectations for sales, earnings, cash flow and other possible future results. While we believe these expectations are based on reasonable assumptions, actual results may differ materially due to any number of factors, including the risk factors listed in our annual report on Form 10-K for the year ended December 31, 2010, and in the cautionary statement that is in today's release and in our slides. We have no plans to update these forward-looking statements after this conference.

Also in today's conference call, we are providing information on non-GAAP financial measures. 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 on Slide 18.

With that, I'll ask Kirk to start with the summary of our results compared to our prior guidance and then onto fourth quarter results. Kirk?

Kirk A. Richter

Thank you, Sondra, and good morning. To begin, let me review our actual 2011 Q4 and full year results compared to the guidance we provided in our last conference call. Starting with sales, we had 3% organic growth in Q4 compared to guidance that we expected to be in a low- to mid-single digit range. Our Q4 diluted adjusted EPS was $0.91 after adding back a onetime $0.02 tax item, above the midpoint of our guidance range of $0.85 to $0.93. For the full year 2011, we had indicated that we expected to achieve mid-single-digit organic sales growth, and we did that with 5% organic growth.

Our guidance for diluted adjusted EPS was a range from $3.73 to $3.81, and we delivered $3.76 excluding restructuring but including net Q4 tax increase of $0.02 a share. We increased our guidance range twice during 2011 to reflect the improved operating performance, favorable foreign exchange rates and tax benefits.

Free cash flow was $391 million compared to guidance of about $400 million. We delivered solid achievement against our guidance for both Q4 and the full year of 2011.

Our Q4 sales were $610 million, a reported increase of 5% over last year's fourth quarter. In our last call, we indicated that we expected some market challenges in Q4 but fully expected to deliver full year organic sales growth in the mid-single-digit range. Our organic sales growth for the quarter, which excludes the impact of changes in foreign currency exchange rates and acquisitions, was 3%. After achieving 4% organic growth in research sales in each of 2011's first 3 quarters, our Research business grew 1% organically in Q4. Our SAFC business had its highest quarterly sales in Q4 2011 with organic growth of 7%. I'll have more comments on those increases shortly.

Acquisitions added 2%, while changes in foreign currency exchange rates had no impact on sales growth in the quarter compared to 2010's Q4.

Our fourth quarter reported operating income was $160 million, a healthy 14% increase over 2010's adjusted Q4. Net income of $108 million was a 6% increase over last year's adjusted fourth quarter. Reported diluted EPS was $0.89, an adjusted gain of 7% over the prior year. Our Q4 free cash flow of $91 million was consistent with the amounts generated in both the fourth quarter of 2010 and in Q3 2011. Higher net income was largely offset by a higher level of working capital primarily due to planned inventory increases, which improved service levels to our customers in select market and slightly higher capital expenditures to support planned strategic growth initiatives.

Looking now at our results for the full year of 2011, our sales grew organically by 5%, with the $2.5 billion in sales setting a new annual high. Both net income and diluted EPS grew 19%. Our adjusted net income of $462 million and adjusted diluted EPS of $3.76 for the year achieved 13% and 14% growth, respectively, excluding restructuring charges in 2011 and 2010 and an impairment charge in 2010. Our adjusted operating income increased by 13% over 2010, consistent with the increase in adjusted diluted EPS. Free cash flow was $391 million for all of 2011, a strong result given the increase in strategic investments.

Increased net income was offset by increases in inventory levels throughout 2011 to support sales growth in the faster-growing international countries. Major uses of that cash includes a repurchase of 2.1 million shares, which returned $134 million to shareholders; dividends of $86 million; acquisitions of $75 million; and the repayment of $100 million of long-term debt.

Let's review our sales performance for the fourth quarter in more detail. The 1% Q4 organic growth for our Research business reflects tougher market conditions that existed in the U.S. in 2010's Q4 or earlier in 2011. Our research sales performance in the U.S. was impacted by overall caution in the marketplace due to uncertainty around funding and resulted in a slight sales decline from the 2010 level. Our research sales in EMEA grew slightly, while our Asia-Pacific and Latin American Research business increased in the high-single digits. Our acquisitions of Vetec, Resource Technology Corporation and Cerilliant added 2% to research sales growth in Q4. Throughout the fourth quarter, weakening foreign currencies reduced otherwise reportable sales in U.S. dollars.

Our Q4 sales for SAFC reflected the strongest quarter of 2011 at $185 million, a new record sales quarter for SAFC. This was a 7% organic increase over 2010's Q4, which was also a new high at that time. Hitech sales growth returned to a double-digit sales level this quarter and continued to reflect the 2011 trend of robust growth based on market demand and increased supply capabilities. Our Supply Solutions business had a solid quarter with growth rates in the high-single digits. Our pharmaceutical manufacturing business for custom API's had its best quarter in 2011 with low-double-digit growth.

We are pleased to -- that SAFC achieved full year organic growth of 9% for the second consecutive year. This track record confirms both our strong market position and the efficacy of SAFC's strategy of providing high-value solutions to our customers.

Our operating income margin in the fourth quarter of 2011 was 26.2% of sales or a 200-basis-point improvement over 2010's adjusted operating margin. This improvement largely benefited from changes in foreign currency exchange rates and SG&A efficiency. As we reported previously, we are committed to making contingent progress on margin improvement. And accordingly, our adjusted operating income for the year is 26.1% of sales, an expansion of 50 basis points over 2010, with the advantage due to foreign currency exchange rates and SG&A efficiency.

Our free cash flow for 2011 was $391 million. The contribution from higher net income was exceeded by planned working capital increases. This cash usage was largely due to higher accounts receivable levels resulting from higher sales, as well as an increase in inventory levels, which have enhanced service in the faster-growing markets in Asia Pacific and Latin America, as well as other select markets. Our capital expenditures in 2011 were $104 million, slightly higher than 2010. We've made investments in the high-growth emerging markets of China, India and Taiwan to support our growing Research business and to meet strong demand for our SAFC Hitech products. We expect to see the benefits of those investments later in 2012.

Now I'll ask Rakesh to comment on some operating highlights in Q4 as well as our 2012 forecast. Rakesh?

Rakesh Sachdev

Thanks, Kirk, and good morning. We had a very strong 2011 with another record year in sales and EPS. We reported 10% sales growth, added $234 million to our top line and increased our pretax profits by about $100 million. And this was our best year ever.

Let me add some color on our Q4 results before commenting on our 2012 outlook. In our Research business, our U.S. sales were impacted by funding uncertainties, particularly in the academic customer segment. We also saw some impact of pharma consolidations in Europe. As a result, the North American Research business declined slightly, but overall growth in the region including SAFC was slightly positive. In Europe, organic growth of 2% was fairly consistent with full year results despite the impact of those pharma consolidations. On the other hand, our focus markets of India, China and Brazil, continued to be a bright spot for us with solid organic growth of 17%. In this region, we experienced increased market penetration by our SAFC business, as well as strong demand from academic and chemical industry customers.

In the fourth quarter, our analytical chemistry initiative continued to receive positive customer response to our newer applications in the environmental, food and beverage sectors, including those added through the acquisitions of Cerilliant and RTC. These acquisitions added 13% to the growth for analytical in this quarter, which was slightly better than the run rate for the year, an encouraging sign for 2012. Our research biology business achieved reported and organic growth of 5%, consistent with our full year 2011 organic growth in this area.

This increase was helped by strong demand and growth of our zinc-finger-related products, which grew about 30% in 2011. In 2011, this innovative technology has enabled us to develop novel programs and cell-based assays amongst other products. We have tried to once again to receive the acknowledgment of our peers in Nature Methods' Method of the Year for gene with [ph] engineered nucleus.

Also in research biology, we have added content to our antibody programs, which is now up to 55,000 products, and we have added new products for gene-silencing technology and non-coding RNA.

In our material science offerings, we also experienced mid-single-digit growth in Q4. This growth came from all geographies led by the Asia-Pacific and Latin America region. We are collaborating across several different scientific disciplines in our work with fuel cell components, hydrogen storage materials and nanostructure devices. In the fourth quarter, we also introduced a polymer synthesis tool for biomedical and nanolithography applications, imparting valuable properties at a cost structure that allows our customers to expand their accessible markets.

As Kirk told you earlier, the fourth quarter was our strongest sales quarter ever for SAFC at $185 million. Organic growth in Hitech was in line with the growth in the first half of 2011 at 16% for the quarter. We continue to see the benefit from growth in the semiconductor market with strong demand for our precursors. General lighting opportunities continue to expand, as more countries around the world have regulated conversions away from the incandescent lighting to more efficient lighting such as LEDs. This is a key contributor to our growth, as we have several products that are central to the LED manufacturing process.

Additionally in SAFC, we are especially pleased to report improvements in our custom pharma manufacturing business with low-double-digit organic growth in the fourth quarter. Demand for our industrial media products used in the production of biological drugs was adversely impacted by the timing of customer purchases and some prebuy that had occurred in the previous quarters. It is probably best to look at many of the SAFC businesses on an annual basis rather than sequentially by quarter, as there can be some large swings quarter-to-quarter for businesses such as Hitech, custom pharma, and industrial media. Overall, we are committed to achieving long-term sustainable growth in SAFC in the high-single digits.

Internet superiority remains a key initiative. We made solid progress in 2011, improving search engine optimization and driving increased customer visits to our site. We recently rolled out new online design tools for oligos called the OligoArchitect and improved custom-ordering capabilities, enhancements that have improved customer service. During the fourth quarter of 2011, we had 12.7 million visits to our website compared to 10.1 million in Q4 2010, a 26% increase. We also increased constant currency revenue dollars through the channel by about 10%. Our focus for 2012 will be to continue to attract a greater number of visitors and increase the conversion of these visits into orders.

Now let me highlight a few other accomplishments for the year. Starting in the second quarter with the acquisition of Vetec in Brazil, we were able to execute on our strategic initiatives to move our supply chain closer to our customers. We continued this trend with our recent expansion of the Bangalore, India facility to enhance packaging and distribution capabilities. We have also just completed the construction of our new packaging and distribution facility in Wuxi, China on our 20-acre campus. The first products are beginning to flow through that facility, and we expect to gain momentum in the second half of 2012.

In the first quarter of 2012, we also expect to launch our SAFC Hitech facility in Taiwan. This facility should allow us to substantially increase production capacity. And this added capacity will be an important driver for higher growth in SAFC in the second half of 2012.

We achieved record service levels in the Asia-Pacific and Latin American region in Q4 through supply chain improvements, which is now translating into stronger sales growth in that region.

We have a couple of new extensions of our zinc finger platform technologies to share with you. We expanded our capabilities to provide knockout ZFN for rat models that exhibit features key to studying conditions such as obesity, diabetes, atherosclerosis, high cholesterol and hypertension. For many indications, especially metabolic and cardiovascular diseases, the rat is the most suitable model for drug development research. We are the only providers of these rat models, which enable researchers to more accurately predict the efficacy of their drugs and help to shrink their drug development timelines. This enables our customers to have more certainty about the safety and efficacy of the drugs that move through their pipeline, hopefully making them more successful and profitable.

We also launched our first offering of zinc finger nuclease modified Chinese hamster ovary cell lines. These products are designed for use in the production of biopharmaceuticals and enable customers to reach the market faster and more cost effectively by reducing timelines for early-stage biological drug development. The distinctive features of these cell lines should appeal to organizations looking to build a robust and comprehensive therapeutic protein monoclonal antibody manufacturing platform.

As I mentioned, we released a new version of OligoArchitect in October on our website to empower both qPCR novices and experts to quickly design sophisticated and compliant primers and probes without having to shuffle data between multiple tools.

This online tool automates the design of primers and probes for quantitative real time PCR assays and offers our customers enhanced convenience and efficiency.

In October, our Verona, Wisconsin manufacturing facility was granted SafeBridge Certification for its commercial scale High Potency Active Pharmaceutical Ingredient production. At the same time, our nearby Madison, Wisconsin facility was recertified to the standard. This process include the review of health and safety programs, containment equipment testing results, as well as appraisal of material handling in GMP production areas. This is an important certification for conforming our adherence to critical stringent quality standards relative to Category 4 active pharmaceuticals and should enable us to satisfy a fuller scope of customer requirements for the unique products we manufacture at these facilities.

Our company's mission is to be the trusted and preeminent global provider to the research laboratory and targeted commercial markets. Let me reiterate our strategic priorities for growth. Growth above the market rate is a significant initiative for us to be achieved both through organic and inorganic means. We continue to focus on the higher-growth segments of analytical chemistry, biology and material science to drive growth. For these segments of research, we are focused on growth through innovation and technology. We intend to protect and enhance the financial performance of our core Research business by becoming even more customer led in our approach, expanding the breadth of our product offering, and increasing the efficiency of our manufacturing and distribution. We continue to make investments to grow our SAFC businesses.

There are 3 characteristics of our SAFC business: One, everything we do is hard to replicate and hard to manufacture; two, whatever we do has a very critical impact on the performance of customers' products; and three, the price that the customer pays for our products is typically a very small portion of the overall cost of the product for the customer. These are the guiding principles for SAFC. Pursuing opportunities while guided by these principles will allow us to continue to grow and grow profitably. We plan to continue supporting growth in the faster-growing emerging markets. We are focused on growing our Asia-Pacific and Latin America region to exceed 30% of our total global revenues over the next 4 to 5 years.

We understand the importance of operational excellence for both improving service to the customer and enhancing productivity in our operations. We have a rich history and culture of continuous improvement in our company. And we will continue driving excellence through our global supply chain through localization of products, strategic procurement and instilling a return on asset mindset even deeper in the organization.

As we have recently demonstrated, we are very willing to leverage our strong cash flow to evaluate and execute strategic acquisitions. We made 4 acquisitions since December 2010. Our most recent acquisition of BioReliance enables us to build a specialized services platform. We are confident that this move will expand our participation in the faster-growing biological drug market and help forge deeper and stronger strategic ties with existing and new customers.

Let me take a moment to review the acquisition of BioReliance that closed on January 31 of this year. BioReliance is a leading global biopharmaceutical services organization, who's flagship business, the Biologics business, provides biomanufacturing testing services to manufacturers of biological products for both R&D and commercial use. The company generated revenues of $126 million in 2011 and on average, has grown sales at double-digit rate over the last 2 years. The company operates in 3 lines of businesses: Biologics Testing, Specialized Toxicology studies and Animal Health Services, about 60% of the sales in the U.S., with the other 40% largely in Europe. BioReliance performs testing for about 75% of the top pharma companies and 90% of the top biotech companies in the world. Almost all of whom are good customers of our SAFC business. BioReliance's global biopharmaceutical testing services fit within our vision of building a compelling and specialized services platform that complements and enhances our existing product and technology platforms. BioReliance's mission is to facilitate the drug development, manufacturing and commercialization activity of its customers. Its ability to develop and execute global testing protocols in compliance with various regulatory standards enables its customers to register products worldwide. The acquisition expands Sigma-Aldrich's role in the fast-growing biological drug market. Together, BioReliance and Sigma-Aldrich provide a broader and richer value proposition for the development and manufacture of biological drugs. Combining SAFC's industrial media presence and BioReliance's biological testing services, we can provide new and better end-to-end product solutions and services to our biopharma customers.

BioReliance was acquired for $350 million in cash. We paid for the acquisition using existing cash for about half of the purchase price, with the remainder financed using our existing commercial paper program at a very attractive rate. I will comment shortly on the expected contribution of BioReliance to our 2012 performance.

As this slide depicts, Sigma-Aldrich has been a key provider of raw material and other products critical to the manufacture of biological drugs, both upstream and downstream in the manufacturing process. The addition of the BioReliance service platform allows Sigma-Aldrich to provide a more comprehensive end-to-end solution and a portfolio of products and services to our customers from raw material testing to lot release and downstream testing.

Now let's turn to 2012 and our expectations for the year. I want to provide some color to help you understand our thinking about the growth trajectory throughout the quarters of 2012. Our organic sales growth is expected to be in the mid-single-digit range for all of 2012. We believe sales growth will be at different rates in the first half of the year compared to the second half. We expect that the research growth pattern will be relatively stable throughout 2012 but gain some momentum in the second half of the year, assisted by the higher growth in China and India from our new facilities and our new offerings in the areas of analytical biology and material science. We expect research throughout in the low-single digits in the first half of 2012, moving to mid-single digits for the second half of the year. For SAFC, we expect sales growth to move from low- to mid-single digits in the first half of the year to low-double-digit growth for the second half. The first half of the year will be impacted by tougher comps related to the prebuy in the SAFC bioscience business in 2011 and capacity constraints in Hitech, which will be alleviated some time in Q2 as Taiwan comes up. First quarter growth in SAFC is expected to be fairly flat. As we bring the additional Hitech capacity in line in Taiwan, we expect enhanced growth later in 2012.

The BioReliance acquisition that closed on January 31 should add about 5% to our expected growth for the company in 2012. And at current exchange rates, changes in foreign currency are expected to decrease otherwise reportable sales for the full year by about approximately 2%.

Now I'd like to give you some guidance on our expectations for earnings per share performance in 2012. Our outlook for adjusted diluted EPS is $3.90 to $4.05, excluding any restructuring onetime transaction costs associated with the BioReliance acquisition and any other special charges. Anticipated changes in foreign currency exchange rates at current exchange rates are expected to lower 2012 adjusted EPS by about $0.15. Also reflected in the EPS guidance is a higher anticipated effective tax rate of 30% to 31% in 2012. The tax rate impact will reduce otherwise reportable diluted EPS by about $0.10. We have also considered a $0.05 to a $0.07 benefit from the addition of BioReliance, which includes an estimate of the purchasing -- purchase accounting impacts. The increase in the effective tax rate in 2012 compared to 2011 is reflective of the higher level of reserve adjustments that resulted in a net benefit in 2011. These are not expected to totally repeat in 2012.

Beyond 2012, we believe that our long-term effective tax rate could improve by as much as 200 basis points given the strong business performance we are seeing in countries having a more favorable tax regime than the U.S.

If our sales expectations are challenged beyond what I've reported today, we intend to launch contingency plans that will reduce cost just as we did in similar circumstances a few years ago. We expect free cash flow to be in excess of $400 million with net cash provided by operating activities coming in, in excess of $525 million. We expect capital expenditures in 2012 to be about $125 million.

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 the next conference call. Again, I want to thank you for your support and ongoing interest in our company. And on behalf of the worldwide Sigma-Aldrich employees, I thank you for joining us today, and now let's open up the call for your comments and questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Isaac Ro from Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc., Research Division

If I could, I just want to ask the first one on BioReliance and specifically, just wondering what your guidance implies for organic growth in that business, so as we look at sort of the 2013 and beyond time frames, what your expectations are for the contribution to growth and maybe just a little bit of color on what kind of margin improvements were made under a vista [ph] that you guys think you can even build off of to get that part of the franchise more profitable as you own it.

Rakesh Sachdev

Yes. So as I said, Isaac, the BioReliance business has been growing nicely. It's been growing double digits. We expect that to continue. When we look at the synergies around this business, a lot of that will come from cross-selling. We have some technology platforms will help their tox business. I think it's fair to say that our revenue synergies are going to be fairly impressive in this business. So the core business, we expect it to grow double digits. We will enhance that through revenue synergies. Frankly, we really didn't even take into account any cost synergies. Most of these was just right on the basis of revenue synergies. And I think over the next 5 years, we'll probably add close to about $50 million from synergies on the top line. As far as margins, the margin of this business have come around very nicely. I think a lot of that was helped [ph] -- being driven because of growth. And even though the overall margin of this business is somewhat shy of the Sigma-Aldrich margins, what I can tell you is that it's not that shy, but the return on assets is really very, very impressive. It's a service business, so they don't employ that many tangible assets in this business. And so their return on assets are even higher than Sigma-Aldrich's return on assets.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Okay. And maybe if I take that as a segue to the second question is, in the past, you guys had committed to hitting 26% to 27% adjusted op margins by 2014. And based on the improvement you guys made in the course of 2011, that does to me seem to be a little conservative, so I'm wondering how we should look at the pacing of operating margins over the next couple of years with BioReliance taken in context. And then maybe lastly, are you guys including in your tax rate assumptions expiration of the R&D tax credit? Just trying to figure out how you guys are assuming that, that plays out.

Rakesh Sachdev

Okay. I'll let Kirk answer the tax question first, and then I'll come back and go ahead.

Kirk A. Richter

Our assumption is that it's currently off the table, and so if it remains there, we'd likely be towards the higher end of that effective tax rate guidance. If it comes back in, that would certainly be helpful.

Rakesh Sachdev

Okay. So as far as margins, Isaac, you're right. We've been making good forward progress. I think I remember when in 2009, I stood up in front of all the analysts in Analyst Day. We were at 24% operating income, and we made a commitment at that time that we would improve our margins by 200 to 300 basis points and drive it to 27%. We are 2 years into that, and we are already at -- in excess of 26%. So we've made good strides. This year, we improved our margin by 50 basis points. I think the wild card on this is really FX. So we did get helped a little bit by FX this year. Given sort of where FX has been going into 2012, it might pose a little bit of a headwind. But I don't expect margins to go down. I still expect that we will expand our margins even in 2012. The extent of that margin expansion will frankly depend on what happens with FX. But we are still committed to getting up to that 27%.

Operator

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

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

In the press release, you mentioned kind of the Research business was challenged in the early weeks of the fourth quarter. So did it change maybe after the 2012 budget was passed?

Rakesh Sachdev

Yes. So I think October and November, I would say, were tougher for Research. December, actually, we saw some strength, and frankly, January, we have seen some strength. So I think it's too early. I want to be a little cautious. I think there's clearly a little more stability out there. Our run rates are a little higher than what we saw in the early part of Q4. But we'll have to wait and watch and see what happens. So...

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

So I guess then to clarify then, in 2012, what you're assuming is that the uncertainty still exists and that what you're seeing in December and January are not just a trend.

Rakesh Sachdev

Well, we are because it's still too early. I don't want to use the experience of the last 6, 8 weeks to say things have changed because we want to be sure. We want to wait a little longer, and we'll let you know. But clearly, what I would say is over the last few weeks, we have seen a slightly different pattern than we saw in the early part of Q4.

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

And then with respect to the emerging markets, you have increased your presence there, your distribution. How long do you think it takes for the full positive impact for some of those changes to really start to, I guess, show up?

Rakesh Sachdev

Well, if you look at what we are doing in China, we have started production and distribution from that facility. I would say by the end of this year, we would have pretty much taken advantage of the first phase. We have plans to actually expand on that campus to do more things, the same thing in India. I would say that, that's why we are saying in the second half of the year, we're going to see some good benefits on the Research business from our sales in both China and India and the same thing in SAFC, our Hitech plant that's coming onstream. In fact, we'll be integrating that plant on the 15th of March in Taiwan. Some time in Q2, we'll start ramping production. Again, in the second half of the year, based on our commitments with our customers, I think we will see some nice growth barring any macro meltdown. We'll see some nice growth in that business in the second half of the year. So our -- the reason our second half looks stronger than the first half is because we are bringing onstream several facilities, several plants and they have -- based on the foundation of commitments we have with our customers.

Operator

Our next question comes from Derik De Bruin from Bank of America.

Derik De Bruin - BofA Merrill Lynch, Research Division

So just to -- can you -- you said 2% FX impact the top line of revenues. Can you just walk us through that on quarters -- quarterly basis? Is that -- what's the Q1 and Q2?

Rakesh Sachdev

I don't have that with me right now, but we can certainly get that to you -- I don't have the FX breakdown by quarter. I would say that probably the FX headwind is a little stronger in the first half than the second half. I'm fairly certain of that. But I don't know how much stronger is the FX headwind in the first half offhand. Sorry about that.

Derik De Bruin - BofA Merrill Lynch, Research Division

Okay. No problem. So on BioReliance, so those of us that obviously, lived through when the business was owned by Invitrogen back pre-2006 and the business was divested in 2007. So what changed -- what would happened to the business from the time that Invitrogen divested to when you guys had purchased it? And I guess, I'm just kind of scratching my head at the 5% to 7% -- $0.05 to $0.07 accretion number just given, you said the operating margins are just a little bit below where the overall business, with overall SA, Sigma-Aldrich businesses right now. I'm just wondering what are kind of factored into your numbers to get to the $0.05 to $0.07 accretion.

Rakesh Sachdev

Well, I think, the first thing I understand, the $0.05 to $0.07 includes a hefty impact from purchase accounting. So the -- I mean, if we don't have the purchase accounting, it will be a much higher number. So we're still trying to finalize the purchase accounting, Derik. That's why it's $0.05 to $0.07. And I would say, if you peel the layers on this business, it has a tox business. It has the biological safety testing business. The Biologics Testing business now is formally grounded. I think what's happened in the last 4, 5 years, this business has taken off, right? So the biological drug business has taken off, and BioReliance is capitalizing on that. And that business is what's driving the profits and the growth. The tox business, frankly, hasn't grown that much, and that's something that, I think, Sigma-Aldrich will bring some strength to that side of the business. So underlying, the business is doing well. I would say the second thing that's happened, which is -- have been very key, is they have a new management team that they put in place about 3 or 4 years ago. I think this management team has just done a phenomenal job of getting this business to where it is today.

Derik De Bruin - BofA Merrill Lynch, Research Division

Okay, that's helpful. I just don't want to live through that again. So when you look at your research chemicals business, so basically, the last 2 years, it's grown roughly in the 3% to 4%, roughly around 4% organically the last year, the research chemicals business. So I'm aware of the fact that you're certainly getting a big pull-through from the emerging market, but I'm also a little bit concerned just the fact as -- that when you're talking about acceleration in the business, from where I would argue, is the time when we look at other life sciences companies in the space and you're seeing your consumable businesses actually slowing and people basically talking about a lower-growth future potentially from these businesses when you guys are talking about acceleration. So I'm just curious as to why you feel so confident you can get that number into the mid-single digits.

Rakesh Sachdev

Well, first of all, we're not saying accelerating. I think what we're saying is the Research business will be fairly stable pretty much like what we did in 2011. I think there are a few nuggets that are going to drive growth. Clearly, the emerging market growth, which I just elaborated with Quintin, that's going to add growth to us. And we feel pretty confident with what we're doing there. And there are -- it is a biology. As I mentioned just now that the whole zinc finger platform, even though it's small, it's been growing about 30% a year, and it's becoming an increasingly bigger piece. So all that adds to our growth. We understand the headwinds, particularly around funding. And what it might -- it's obviously -- it's dampening some of that growth. But overall, we still feel pretty good with the fundamentals of the Research business that we have.

Operator

Our next question comes from Jon Wood from Jefferies.

Jon Davis Wood - Jefferies & Company, Inc., Research Division

So are you willing to go into what you expect for the amortization in the BioReliance guidance?

Rakesh Sachdev

Not today, but I think once our guys finalize that, we will certainly get that. We will share that with you. There's no reason not to, but I just -- we are still working through some of the estimates and the intangibles, and so -- we're only few days into the acquisition, so we're going through that.

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Can you detail the pricing contribution in the fourth quarter and also what you expect for 2012?

Rakesh Sachdev

So pricing has been -- I think for 2011, about 1% to 2%. I -- we expect next year also to be in the 1% to 2% range. That's what we have in our assumptions.

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Okay. And that's the overall business, correct? Not just research?

Rakesh Sachdev

That's the overall business, but most of the pricing we get is in the Research business. And we typically get about a couple of percent on Research, but when you look at it on an overall sales level, it drops to little below 2%.

Jon Davis Wood - Jefferies & Company, Inc., Research Division

This is for Kirk. On the cash flow side, surprised that you're only expecting $525 million in 2012. Can you just detail what's behind the working capital assumption there? It seems like your inventory has leveled out at this point, but I want to make sure I understand the working capital assumptions that you've got in your guidance.

Kirk A. Richter

I think there's 2 things. Inventory is certainly a part of that, and we find that every time we make an investment in inventory in those Asia-Pacific, Latin America markets, the service level goes up, and that helps the growth in those markets. I think it's also fair to say that, from a receivable standpoint, that customers in those markets pay slightly slower than they do in the U.S. and Europe, but we think that, that concept is also built into our pricing, so we don't think we lose anything at the margin line for extending slightly longer terms.

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Okay. But it's fair to say that your inventory days outstanding is going to increase in 2012?

Kirk A. Richter

No, it stayed about in the mid-6 month range and should largely stay there overall. And I think as we also moved some of our operations closer to the customer in those markets, we obviously, gained some of the transit time that we see now between the U.S. and Europe to get products to those markets. So that will be helpful.

Rakesh Sachdev

So again, I can add a little more color. I think 2012, little bit of a transition here on inventory. We certainly are not expecting inventory days to increase. In fact, I expect that going into 2013, once we have our operations in China and India running and we don't need the inventory that we today need in the U.S. and Europe as much to support them, we will actually see a reduction in the future and -- which will help cash flow but probably more towards the end of this year and going into 2013.

Operator

Our next question comes from Jon Groberg from Macquarie Capital.

Jonathan P. Groberg - Macquarie Research

Just one more question on BioReliance and then a quick follow-up. Rakesh, on BioReliance, can you remind us where -- is that going to be reported as its own line? Or is that going to be folded in somewhere now that it's kind of a unique business and service business? And then can you -- for that $50 million in revenue synergies, can you maybe give like a concrete example just again for those of us that have seen that business in other people's hands where it was tough for those to materialize? Can you maybe give us a more concrete example of kind of how you see the revenue synergies playing out?

Rakesh Sachdev

Yes. So first of all, to answer your first question, the BioReliance business will be under the SAFC banner, and we will break that out as a services business under SAFC. So that's where it'll be. And as far as the synergies, again, the revenue synergies are both on the tox side as well as the Biologics side. I would say that -- when I say $50 million, I was talking over the next 5, 6 years. So the synergies, obviously, are going to be very modest in 2012 and 2013 and then building up. And we have taken a very careful look. Before we embarked on this, we had done a lot of surveys. We have talked to a lot of customers, and frankly, there are customers where we are very strong, where BioReliance doesn't have the strength and vice versa. And I can see that a lot of the customers have embraced us very positively. We are building plans right now on an account-by-account basis. We have integration teams that are obviously already have started working. And we feel pretty good that based on what we are hearing from our customers and their confidence and having an end-to-end solution that we'll be able to drive sales. Again, this $50 million after 5, 6 years, it's going to be modest in the first couple of years.

Jonathan P. Groberg - Macquarie Research

But just to be clear, are like -- are the decision makers who are making the same decisions to currently buy some of the products that you sell, even to some of those end markets, the same? Is that how you kind of view that there are opportunity there? I mean, it seems like -- from the outside, it seems like a service business is a little bit different or unique, so I'm just trying to understand that.

Rakesh Sachdev

You're right. I mean, the service business caters to the QC, QA areas of the biopharma companies. We also interact with them, but we also interact with other folks in the company. I think this gives us a much bigger seat at the biopharma companies. We become a far more important player than if we were just supplying cell culture media or just being a service provider. And we've already seen that through our conversations at pretty high levels at a lot of these companies. So we'll see how it plays out.

Jonathan P. Groberg - Macquarie Research

Okay, and then maybe there's one follow-up on this. Obviously, you highlighted some of the strengths in the research model that you have and you're moving into the service business. I mean is this a big enough platform? Or would look to do something even bigger and bulk up even more on the services side?

Rakesh Sachdev

Well, listen. I mean this is our first step into service. We want to kind of see how it goes, and I won't rule out the possibility down the road, if it makes sense, for us to maybe adding into this. But we want to first make sure that we are delivering on our commitments on this one, and then, we'll go from there. Just coming back to BioReliance, the other thing is, as I mentioned, is most of this business is really in U.S. and Europe. And since we have a very strong presence in Asia Pacific and you can imagine that there will be a lot of activity around biosimilars in the future, in Asia, we will help take this recipe into parts of the world that BioReliance is not in today.

Operator

Our next question comes from Dan Leonard from Leerink Swann.

Daniel L. Leonard - Leerink Swann LLC, Research Division

A question for either Kirk or Rakesh. As we think about your margin expansion plans in 2012, is it fair to think that your gross margin is going to be down compared to 2011 to both the BioReliance and foreign currency and then you get some leverage on the operating expense items?

Rakesh Sachdev

I don't think it should be down. I would expect it to be somewhat flat. I think we'll get some SG&A leverage below the gross margin. But BioReliance isn't big enough that it will have that much of an impact on our gross margin. It may have some. And as I said, I think I mentioned to Isaac earlier, is that the wild card is really FX. But FX probably tends to have a little more volatility on our gross margin than any other thing.

Daniel L. Leonard - Leerink Swann LLC, Research Division

Sure. Okay. And then my one follow-up, Rakesh, do you plan to report results -- now that you've closed the BioReliance deal, do you plan to report results going forward excluding acquisition, amortization like many of your peers do since it'll now be a bigger number for you? Or do you continue to plan to incorporate that in your results?

Rakesh Sachdev

No, listen, this is not big enough. As a company, we have put everything in. We have tried not to make too many adjustments, and unless we were to do something different, I don't -- I expect that we'll continue to -- of course, we will tell you how much BioReliance sales were and what it's doing, but I don't expect we will call it out.

Operator

Our next question comes from Peter Lawson from Mizuho Securities.

Peter Lawson - Mizuho Securities USA Inc., Research Division

I have -- just on [ph] BioReliance. Is it sensible [ph] to assume so about $22 million, $23 million benefit in 1Q? Or is there some kind of lumpiness around that business we should be thinking about?

Rakesh Sachdev

Well, first of all, we have only 2 months, right? Because we closed at the end of January, so we have only 2 months of BioReliance. So whatever that works out. I don't have the exact number to what it'll be for Q1. And the BioReliance business is not that lumpy. If you look -- and I have looked at their business historically quarter-over-quarter. I think it probably -- it is -- it does have more volatility than our Research business but probably has less volatility than our SAFC business. I don't know if that makes sense.

Peter Lawson - Mizuho Securities USA Inc., Research Division

Definitely helped. So you're thinking like $125 million for the year?

Rakesh Sachdev

Well, we did $126 million -- I mean bid at $126 million last year. Obviously, we want to grow that double digits. And so I guess you can probably estimate what 2 months of that would be for this.

Peter Lawson - Mizuho Securities USA Inc., Research Division

And then just as a follow-up, just around the gross margins on that business, where do they compare versus Sigma's?

Rakesh Sachdev

Well, their operating margins -- we run 25%, 26%. Their operating margins are probably closer to about 20%. So that's -- or maybe a little that -- little under that. I don't have the exact numbers, but it's somewhere in that range, a little less than that. But as I said, the return on assets is probably significantly higher than Sigma-Aldrich's because the tangible assets that they use to drive this business are pretty low.

Peter Lawson - Mizuho Securities USA Inc., Research Division

Got you. And then on the gross margin side, we should think about that being lower than Sigma?

Rakesh Sachdev

No, I don't have the gross margin. I think the gross margins are also probably a little lower than our average business for sure, yes. It's a service business.

Operator

Our next question comes from Tracy Marshbanks from First Analysis.

Tracy Marshbanks - First Analysis Securities Corporation, Research Division

A couple of real quick ones, not to pester [ph] on BioReliance too much, but I've got to. Because of the nature of the business there, is the amortization schedule to be fairly compressed? Is that correct? And do you have an idea what that may look like just on a time frame?

Rakesh Sachdev

Well, I think the amortization schedule -- again, I'll talk to the technical accounting guys. But it's probably what, Kirk, or some media period or something?

Kirk A. Richter

Yes, it is pretty long. It's -- there isn't much inventory involved. It tends to be more level across a period of years than if you had inventory.

Tracy Marshbanks - First Analysis Securities Corporation, Research Division

Yes, okay. So it will be a little bit different than we'd normally think of for a product company.

Kirk A. Richter

Correct.

Tracy Marshbanks - First Analysis Securities Corporation, Research Division

All right. Quickly on -- you mentioned a good fourth quarter custom API. Obviously, in that business a quarter doesn't make a trend. But should we read into that, that you see some upside opportunities there and a better pipeline? Or it was a good quarter and that's the way you look at it?

Rakesh Sachdev

Well, I think a couple of things, we put a new facility in Wisconsin for the manufacture of these APIs, outside Madison. And we've been working with customers for the last several quarters, and we are finally beginning to sign them up. And we're beginning to fill our facility in Wisconsin, which is what drove a lot of the growth in Q4. And I think that business is probably going to stick as we move forward. It tends to be a little lumpy, but now I think we have made a lot of progress. People have been working hard with our customers and I think the outlook for next year is definitely a lot better than it was last year. So we didn't really grow in the first 3 quarters of 2011, and we started growing nicely in -- I mean at the fourth quarter. And we'll, hopefully, see some growth in -- that will be fairly good.

Tracy Marshbanks - First Analysis Securities Corporation, Research Division

Great. Final question, sort of getting it down to the field level again on your localization strategy. Maybe in -- maybe anecdotal, but in some of your markets, sort of what used to be the situation for customers as far as getting product with you or with the competition? And where are you at currently, so we can sort of gauge how big a change it might be for the customers?

Rakesh Sachdev

I didn't get it. Sorry, can you repeat that question again? I got lost, but, yes [ph].

Tracy Marshbanks - First Analysis Securities Corporation, Research Division

It was really a question around service time frames and service levels for some of your emerging markets where you have your localization strategy in play. Just some metrics on maybe what it used to be like for customers to get product and what you're able to deliver now.

Rakesh Sachdev

Yes. So I would say that 2 things that I have [indiscernible]. One is clearly the service levels will improve. This year -- in 2011, they improved because we enhanced inventory. And future, since we'll have local operations, we'll enhance service levels even more. Today, the service levels in the international markets are less than what we obviously can achieve in the U.S. and Europe. And again, we are trying to get to about 85% service levels. In Asia Pacific, we are probably a little under that today. I would say the second thing that's happening is we are opening up markets. And I've said this before. We're opening up markets that we can participate in. We just could not participate in our Tier 2 markets in China and India, which are more price competitive markets, and these facilities will now allow us, at the same margin levels that we have enjoyed in our premium products, to open up new markets. And that's what's going to happen. So we're going to improve service levels with existing customers, and we want to open up new markets that we didn't have access to previously. Now I think both those things are going to drive both top line and bottom line growth.

Operator

Our next question comes from Tycho Peterson from JPMorgan.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

First on SAFC, you're talking about that business going to double-digit growth in the back half of the year, largely driven by kind of the capacity adds as you talked about in China and Taiwan. I mean how much is that do you think would -- carries over going forward into '13? In other words, I mean, we think about this as being kind of a high-single-digit growth business, but is there a chance back half of the year and into '13 this continues to be kind of be a double-digit growth segment? And can you talk about kind of the size and scope of the capacity that's been added?

Rakesh Sachdev

Yes, so I think it will continue to 2013, but once you get into the second half of 2013, you won't see that because you'll be comping it to the second half of 2012. There we would have already seen that increase, right? So we still think that going into 2013, we would still see high-single-digit growth for SAFC. As we look at our long-term plans for this business over the next several years, I think we are comfortable that we have the pieces within this business to grow at that level. So yes, 2013 probably will be benefited in the first half of the year because of this. You probably won't see that growth rate in the second half of 2013. As far as capacity, we are adding significant capacity in Taiwan for Hitech, which will help us with further growth in 2013. Now we haven't given you guidance on 2013, which we will hopefully later in the year.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Okay. And then on BioReliance, I know -- I think you said there was a pretty wide range of customers over 600 or so. But can you just talk about how concentrated the revenues may or may not be? I mean, obviously, there's been a lot of volatility in this service industry for pharma and just wondering about the competitive dynamics as well in bio testing and tox. We've seen a lot of tox capacity being added so...

Rakesh Sachdev

So BioReliance also has a fairly diversified customer base that is, I believe, there is no single customer that makes up more than, I believe, 6% of their revenues. And then you have a bunch of them much smaller. So I think there's a lot of diversity in the customer mix that BioReliance has, at least in the U.S. and Europe. And that's a good thing. So it's very much like the Sigma-Aldrich model from that aspect.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

And from a competitive standpoint with some of the additions in capacity that we've seen in the industry, in tox in particular, can you talk about how you see the competitive positioning for that asset?

Rakesh Sachdev

Yes. So again, not to get too technical but what BioReliance has -- they have 2 toxicology. They do generic toxicology and they do mammalian toxicology. And I think if you look at the generic toxicology, which is the business that has been doing nicely and will continue to grow for BioReliance, that's not a commodity business. In fact, when you talk about tox globally, where there's too much capacity, it's more of the toxicology that isn't around generic toxicology. So I think if you look at BioReliance and what they do, there are areas where they're working on now that will be differentiated, and they will be able to grow that.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

And they have some nontraditional health care businesses, if you will, right? Nutraceuticals, cosmetics and things. I mean do you hang on to those? Or are those relatively small businesses that you wouldn't necessarily invest in?

Rakesh Sachdev

Well, they're going to be very small because that hasn't been on the radar screen at least there [ph].

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

And then last one, maybe on -- in just -- in the industrial media business, can you talk about -- I mean I think that slowed a little bit maybe this quarter. Can you talk about how much pent-up demand there is? And I mean, you're expecting orders to obviously to be filled here in 2012. But how do we think about inventory levels for the industrial media business?

Rakesh Sachdev

Yes, so first of all, just so we understand, a year ago, there was some prebuy activity. And the reason was, I think as you know and I call this out, we were shutting down a few of the plants as part of our restructuring and moving them. And our customers knew that, that was happening towards the back end of 2011. So they did some prebuying. So the reason why the growth in the first few months of 2012 in the industrial media business is going to show low growth is only because of that. The absolute sales would still be very good. It's just because they're trying to comp it to a time when they did some prebuying. As far as the growth in this business, we still expect high-single-digit growth occurring over the next several years. We don't see that changing based on the number of drugs that we are working on and the number of products that we're working on with our customers. So we have a pretty good pipeline.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Okay. And any major change in mix within that business more toward animal origin free and synthetic?

Rakesh Sachdev

I couldn't tell you offhand if the mix was changing.

Operator

And that does conclude our Q&A session for today. I will now turn the call back over to Sondra Brown for closing remarks.

Sondra Brown

Thank you again for your participation. We expect to release results for the first quarter of 2012 before the market opens on April 24, 2012, and we will follow that with a conference call the same day at 10:00 a.m. Central Time. This concludes today's conference.

Operator

Thank you, ladies and gentlemen. That does conclude today's conference. You may now disconnect, and have a wonderful day.

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