Sigma-Aldrich's CEO Hosts 2012 Business Review Conference (Transcript)

Sigma-Aldrich Corporation (NASDAQ:SIAL)

2012 Business Review Conference

March 29, 2012 9:30 am ET


Kirk A. Richter - Vice President and Treasurer

Rakesh Sachdev - Chief Executive Officer, President and Director

Franklin D. Wicks - President of Research and Executive Vice President

David A. Smoller - Chief Scientific Officer

Shaf Yousaf -

Eric M. Green - Managing Director of International and Vice President

Gilles A. Cottier - President

Charles C. Harwood - Chief Executive Officer, President and Director

Philip Rose - President

Chelli Faletti -

Unknown Executive -


Jonathan P. Groberg - Macquarie Research

Tracy Marshbanks - First Analysis Securities Corporation, Research Division

Amit Bhalla - Citigroup Inc, Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

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

Unknown Analyst

Daniel Arias - UBS Investment Bank, Research Division

Dmitry Silversteyn - Longbow Research LLC

Gaji Balakaneshan - The Buckingham Research Group Incorporated

Kirk A. Richter

Great, I think we're going to go ahead and get started. So I'm Kirk Richter, the Vice President and Treasurer and your Investor Relations Contact. I want to welcome everybody to Sigma-Aldrich's 2012 business review. Certainly want to thank all of you for coming, including those that are on the web -- those that are joining us via webcast.

What we're going to do is give you an overview of our business today and the activities that we believe will drive our continued growth, both at the top and bottom line. Our overall objective for our company is to enable science to improve the quality of life and through that, to continue to provide above-market returns to our shareholders.

The meeting packet that's in front of you has a couple items in it. It's got a hard copy of the presentation, as well as a electronic copy that you can plug in to your PC if you want to do that. It's actually in the leather Sigma-Aldrich Finder.

In terms of meeting logistics for the day, all of our formal sessions will be in this room. We will take a break about mid day and you're welcome to join us again for refreshments. There are signs out in the -- outside of the building that direct you to restrooms and phones. We ask that when you participate in the Q&A, at the end of the program, that you do try and get as close to a microphone so that it accommodates the folks that are joining us via the webcast. When we wrap up the presentation and the session that follows lunch today, we will have transportation to the airport for those that need it. After the session, we are also going to ask you to fill out a meeting evaluation that we'll send you electronically so that we can continue to improve on these presentations. Finally, after lunch today, for those of you that are interested, we are going to make facility tours of what is our Life Science and High Technology Center here in St. Louis. We'll announce that towards the end of lunch so that any of you that want to participate in that are certainly welcome to do that.

So I am required to say that today's presentation will include some forward-looking statements, including our expectations for sales, earnings, free cash flow and other results. These will include specific expectations for 2012 and longer-term, and the strategic activities that we expect will drive those results. We certainly expect that our beliefs and our expectations are reasonable, but actual results could vary for any number of reasons that are all listed here. And we have no plans to update these forward-looking statements following today's meeting.

Just a quick overview of our agenda for the day. Rakesh will start with an overview of our business, some of the activities and the results. I'll follow that with a financial review and then our business units, we'll talk about some of the activities that they have. And including those that will drive our growth above market rates. So with that overview, I'm going to ask Rakesh to start the overview. Rakesh?

Rakesh Sachdev

Thanks, Kirk, and good morning to everybody. See a lot of familiar faces and a few new faces. It's great for us to have you here in St. Louis. I know we didn't do this last year, we were here 2 years ago. And really last year was at the heels of my predecessor who had passed away a few months ago, which was really very tragic and I just taken the office. And so we decided that we would wait a year.Now I know we have been speaking with many of you over the course of last year, so it doesn't mean that we haven't been communicating and hopefully you've been hearing our story. And today we can get a chance to really give you that in a lot more detail. We have the entire management team here. You will see the management team. I haven't tell you that one of our management team members is not here today. We recently announced the appointment of Jan Bertsch, our new CFO in the company. We're very excited to have her on board. Unfortunately, she had a personal commitment that she had made a year ago and she could not get out of it. But she's anxiously looking forward to getting to know a lot of you and that will happen in due course. So again thanks for being here.

What I'm going to do is I'm going to give you a quick overview of Sigma-Aldrich, I going to talk about some of the markets and the trends and how it impacts us as a company. And of course, I'm going to talk to you about how we are positioning the company for the future, our strategic priorities and where you can expect this company is going in the next several years.

So with that -- our vision remains the same. It's simple, it's to enable science to improve the quality of life. And that it has an enduring purpose that has endured for many years. And if you'd look at our mission statement, it's to be the trusted and preeminent global provider to both the research laboratory, as well as targeted commercial markets. So we are playing, and we'll talk a lot about that today, in the lab space but also in targeted commercial markets and adjacencies.

Just some facts about the company. We have a global franchise that is extremely strong. And that strength really is in the diversity of what this company does. We have diversity in the products that we offer, the services that we offer, we have diversity in the geographic segments that we play in and we have diversity in the end market. So as you see, for most of you who've been following us, you can see that from a geographic standpoint, very quickly the feast of our business in the emerging markets that we refer to usually as APLA, as in Asia-Pacific and Latin America, has been growing. And that's about 23% of the business. And Eric Green, who runs that part of the business is going to, kind of, talk to you more about that in the end this morning, about very exciting things happening. If you look at the end market, again about 1/3 of our business is tied to pharma and biotech, about 1/3 is tied to the Industrial segment and close to a little less than 1/3 of our 25% is tied to academia and government institutions.

We have over 9,000 employees and we are in many, many countries. We have operations in many countries where we do business. Practically everywhere in the world, our customers expect us to provide similar service levels. And I'll tell you, our service levels in the emerging market have been growing up quite significantly which has also led to a very rapid growth for Sigma-Aldrich. I'll let the team, when they come, and talk about what we've been able to achieve in the last year or 2.

Two distinct businesses, most of you know that. We enable science for both manufacturing, as well as enable science in the lab. Our Research business, or the business that we have that caters to researchers, is about a little over 70% of our business. And then close to 30% of our business is in what we refer to as the SAFC, or the Fine Chemical business. And I will give you a little introduction on both and then of course Frank Wicks, who runs our Global Research business is going to be down here speaking about that business, and Gilles Cottier, who runs our SAFC business will do the same for SAFC.

The Research business really, if you look at the strategy of what we are trying to do there, we are selling convenience, we are selling science, we are selling products. But it's the convenience that provides a very broad portfolio of products to our customers who trust the quality in the service that we provide. And frankly, the franchise is strong because of all the things that we offer. Now if you've seen the layers within the Research business of what we do, you can see there are several things that we do. Our Biology business is almost 1/2 of what we do in research today. So biology based products, about 1/2. And then in biology, we have the traditional Biology business, which is selling BioBasics, which we have done as a company since it began. It's a very solid business, a very profitable business for us. And then as you know for the last several years, we have been getting into the more innovative areas of biology. And Frank and David Smoller will be here to talk about that, but we're into biomolecules, we're into Functional Genomics, we're into all sorts of series of [ph] cells. And we are into things like gene editing. Businesses within that innovative Biology business that are growing very, very rapidly for us. I mean, we'll point that out to you.

We also have about, I would say, close to 20% of our business, is what we refer to as our Analytical business and Material Science business. And those are the 2 high-growth businesses for us. The Analytical business is where we supply separation columns, we are in the Standards business and we have exposure to different markets such as environmental safety, food safety and we, frankly, made a couple of acquisitions in the last 12 months in the space. And those businesses are doing extremely well for us and growing and we're very, very pleased.

Of course, then we have our Essentials and Labware business, which is the basic stuff that lab scientists use in the labs. Whether it's supplying acids, or bases or solvents. Again, what we bring there is convenience, we bring high quality -- or high purity of products that we provide. And even though that market is fairly mature and not growing as fast as some of the other markets that I just talked about, we have very important segments there. And then of course, same thing with the Chemistry business where we have been -- we've had some tremendous run [ph].

I think what you're going to hear from Frank is there are several tenets of our strategy in research. We are expanding our products and services. We're using innovation clearly, and we are also using the eBusiness channel. We are expanding into the emerging markets such -- it's a combination of many, many things that we are doing in the Research business that certainly gives us a lot of optimism of where we can take this business over the coming few years.

The SAFC business, and you're going to hear Jim talk about it. Really it's a based on 3 things. One, we are fairly unique in what we do. So we have chosen areas where products are hard to manufacture. And what we do is typically stuff that is very difficult to manufacture, is very difficult to handle. So whether it's precursor chemicals for the electronics industry, which are highly flammable and difficult to handle or high potency drugs, it's -- typically that's what we do. It's usually products that have a very critical impact on the performance of the end product. So for our customers, this is a very significant product. And just one thing I would say is it's usually a product that makes up a small part of the cost of the end product. It gives us leverage on pricing and many other things, which is why this business for us, unlike some of the high-volumes, some already refined Chemical business, they're very, very far from what we do. And Jim is going to talk about that. And this business that we have been growing successfully. I would say this 2011 was a second-year in a row that we grew this business in the high-single digits, and we expect the same in 2012. And so we are very excited about some of the things that we're doing. And this is products and services. We acquired BioReliance. It has the exposure to the same kind of customer base and the same growth trends. And Charlie Harwood, who runs BioReliance is here today, and he will speak with you about the things that we are doing in BioReliance and some of the integration issues that we have been working on.

For those who have followed us know the Sigma-Aldrich value proposition is based on many pillars. It's not just one thing. We are a science-based company and we have a lot of scientific knowledge in this company. But we are also a tremendous distribution and logistics company that can provide the service that our customers need no matter where they are in the world. 95% of the time, people who order our products, we give them the next day in most places. Quality and compliance is an extremely important thing for us. We have a very large QA/QC function in this company. Everything that leaves our docks and our doors is certified and because we are supplying the -- all of this stuff -- we are supplying all sorts of very important products. And so this is very truly, very important, I would say it's a comparative advantage that we have. Extensive selection of products and services, we offer over 200,000 products today, I think we have probably one of the broadest offerings of products in our category. And of course, when you do all this, you establish trust and you build a franchise, which I think is what we have done over the years.

I'm not going to talk a lot about the history, most of you know this, but I can tell you that I think from a performance standpoint, which really demonstrates the ability for this company to execute, is you have to go back, in fact you could go back 35 years, this shows the last 5 years and you can see that we have had consistent stable growth in several of these metrics. Our sales have grown about 7% on average. Our ROE has remained high right through this year in 21%, 22%. That bounced up and down partly because ROE is also influenced by exchange rates. So the reason I think of the event last year is because when the dollar becomes a little weak, it has an impact on ROE. But obviously, fundamentally our return -- our actual return on the investor capital, our returns on the balance sheet metrics are very, very strong in the quarter. And margin expansion has been good. I stood here, I think in 2009, and we talked about expanding margins about 300 basis points, I remember the time it was only about 24% and we certainly did that over 4 or 5 years. We've been on that journey and it's happening and I can tell you because I get this question, about are we expanding margins at the expense of growth. And I can tell you, standing here, absolutely not and we will not do that. Margins are going up because we have, frankly you'll have, a lot of low-hanging fruit in the company. And we've been taking advantage of that, we've been getting our supply chain more efficient. And we've been very successful. There is still more room. But I would tell you our margins are pretty good where they are. And we are clearly -- and if you looked at what we are focused on, in growth. Because when we have growth all those things happen. And then, more than Charlie has been seeing us [indiscernible] for many of us in the company. And we know that we are actually producing shareholder value for many of our investors, or all our investors, and that we have outperformed the broad industry as well as outperformed our peers.

Let's talk about our market space. Where does this company play? And you can see on the left-hand side, if you look at the lab market, that's our Research business. We have estimated this to be about $25 billion. And we have close to about $2 billion. So there's a lot of headroom for growth and if you peel that back even more, you see that's made up of 3 broad areas. We have chemicals, reagents and kits, which is about 1/2 of the lab market, and we are [indiscernible]. That market is typically growing and we foresee that to grow at about 3% to 4% [indiscernible]. You have the lab essentials market, which is sort of as I said, are the essential products that most laboratory scientists use and that's about a $3 billion business. That's probably not growing as fast. But again, it's the business that's highly predictable, and it's where we still have a lot of value in what we do. And then the last one is labware and this is, again, plasticware and glassware, many other products that we are in today, but not in a very big way. So that's probably where we have appraised more shares, that's close to about $10 billion revenue [ph]. And then if you look at the targeted commercial markets at the right side there, our SAFC business. Life Science -- they play in 3 segments, Life Science, electronics and industrial. In fact, over 70% of SAFC's business is in the Life Science segment and that's a $55 billion addressable market for us. It's huge and it's -- it also includes services and it's fairly one that we are pursuing quite heavily. The electronics, we have carved out a niche in electronics. The total electronics market for chemicals is larger. But as I said, we are focusing on things that are hard to manufacture, that have a profound impact on the end product. And so for us, that market today is about $5 billion. And Fred Rollins, who runs their high tech business, is actually here today and he's going to speak with you about the things we're doing for the LED segment, what's happening in the LED segment, what's happening in the semi-conductor segment and why we are very excited about that segment. And them the last one is the industrial segment where we supply critical raw material and that's, some of you know, that's we call the Supply Solutions business and all of that is there, that we believe has an addressable market for us of $15 billion and frankly that business has been doing quite well for us in the last year and even coming into this year, that's been very successful.

I'll talk about some of the external trends and the impact some of those trends is likely have on our company. We believe that these trends could have a very favorable impact on Sigma-Aldrich. So we'll talk a little bit about industry consolidation. Well I'll tell you is why there's an industry consolidation that's been taking place. This industry is still very fragmented and I'll show you why. The growth of the Internet and how that's impacting the industry and really creating some opportunities for companies like Sigma-Aldrich. Emerging market growth, frankly, we have been there, we have been capitalizing on it. I'll talk a little bit about outsourcing of the pharma company and then how that's creating opportunities, selective opportunities for companies like Sigma-Aldrich. And then, the regular 3 environment and what's happening in the [indiscernible] in certain areas, especially with renewable energy and those kinds of things and how we have taken advantage of that, whether it's through our materials science activity or some other business.

So if you look at consolidation, while consolidation has taken place, if you really look at -- and this is the research segment. If you look at chemicals, reagents and kits, and even break that further, and you look at some of the Analytical business that you're in, life science, reagents and kits, and specialty chemicals, you can see that the soft tickers have a decent amount of shares, anywhere between 25% and 40% and we are one of them. But then you have a huge market, that is so fragmented, with a number of small players. And the opportunity really is-- one is to gain market shares, which through organic means, which I believe we have been doing, and the other one is to look at possible bolt-on opportunities where it makes sense. So we can either get more channel, more access, more products and so on and so forth. I mean, I think Frank's going to talk a little bit about that. Same thing with essentials and labware. You have a few big players and -- but then again it's a very, very fragmented, and interesting. And mind you, I'm talking about the total globe, I'm not just talking about the U.S.

If you look at what's happening with the Internet and the growth of web-based channels. Let me ask you something, why do people even come to the Internet for a company like ours, and primarily for a couple of reasons. One is if they want product knowledge or technical content, they'll come to us. And the other one is for transaction, for a point-of-sale. And we actually closely monitor how many people come to get technical specs, to get product knowledge, to configure their experiments. And you look at the statistics, it's really pretty dramatic. In 2001, about 10 years ago, we had about 7,000 visitors per month on our site. Now in 2011, it's like 4.5 million per month. I mean, it's incredible. Now I would say that not all of them are really getting to our science physical [ph] content, but I can tell you it's more than 1/2 of these people are really using the Sigma-Aldrich site. And then we have hooks, and our hooks beg people when they come to visit at our site into buying a product. And we look at eyeball conversion, with look at how many eyeballs come, will they be converting, how that metric is changing over time and we have obviously a very advanced e-Commerce scene working in the company that is using a lot of this data that we picked up to configure, change, enhance our webspace. And then same thing from the point of sales I think most of you know that 50% of our research sales today are conducted whether it's B2B or B2C, it goes through the website. So very important for us.

The emerging markets, very quickly because Eric's here, he's going to talk about what we are doing. But if you look at -- if you look at just 2 years ago in 2009, 9% of the lab spending, this is just research lab spending, 9% was -- and we have defined emerging markets there which is China, India and Latin America, Brazil for the most part. And if you look at what's happened in -- by 2013 it will be about 13% of the total spending and almost 20% of the total spending was in just these countries in 2016. And if you'd go back and look at how Sigma-Aldrich performed because this market is growing at about 16% to 18% CAGR. And so how did we perform in the last 5 years and we -- when we look at that, since 2006 to 2011, in the same countries where the markets have been growing 16% to 18%, we have grown up 25% a year. And I can tell you that at least for the foreseeable future, we see that engine as being pretty strong. I'll show you a slide that says long-term for planning purposes, we have assumed a slightly lower growth rate. We want to be conservative. But I would say at least for now, that engine is doing pretty well. And as you can see, the developed world is likely to grow in the low-single digits, 2% to 3%. So our strategy there to expand the business in those countries. It's through the innovation, it's through customer intimacy and we talk about some of the things that we are doing so that we are going to be able to be, obviously, satisfied just with a 2% to 3% growth in the rest of the world.

The outsourcing in the pharma industry. So if you look on the left side, it's perfectly fully integrated Pharma company who in the past has performed all the functions-- sales, manufacturing, built their own research-- has clearly shifted. Most of the large pharma companies have changed their business model and they have gone to CMO, contract manufacturing organizations, to do some of the manufacturing. And they're going to the CROs to do their research. And a lot of that is happening, including R&D. More and more of the large pharma companies as you probably know are working with the universities. They're giving grants, and in turn, we are working with the same universities and becoming the beneficiaries of that indirect plan that's taking place whether it's universities or CROs in China or CROs in India. I spent 2 weeks this month in Asia and I visited a number of the CROs and CMOs. And there's really a lot of stuff that's happening and we are playing a very important game with them to support them as their business is growing resulting from this outsourcing.

Applied markets are opening up for us. So when we look at some of the regulatory environments and what's happening, if you look at global renewable energy use, this is wind power, solar, biofuels, clearly growing at twice the rate of what the total energy consumption is in the world. And we are developing and have developed and are selling a number of products that cater to this industry. So we are trying to ride the wave of this growth in using our material science efforts. We have centers of excellence working on a number of products in there. And which is why our Materials Science business is growing double-digits, and will continue to do so. Same thing on the energy side, you're going to hear the LED story. How we are capitalizing on the growth of LED, not just for television but for general lighting, for all backlight displays, when you're using your iPhone or iPad, all LED -- and we are right there. We are one of the 3 or 4 companies that's providing, remember that's hard-to-manufacture products that is very critical to give the brightness of the LED, we're right there.

Food and Agriculture. So the acquisitions that we have been making in the analytical space, whether it's Cerillian that we acquired in Texas and RTC, we are developing standards for environmental and food safety that we are providing around the world and that business is growing because of those trends.

So let me now bring you back into the 4 walls of Sigma-Aldrich. What does this all mean and where are we going? And if you look right on top, we see ourselves as a growth company and we want to continue to drive overall revenue growth. It's very important for us, that's what this management team is focused on. We obviously, want to do that while we maintain a strong return to our shareholders, whether it's return on equity or return on capital, return on assets. And then margin enhancement is important, well it makes sense. And again I say that because I don't want you to run away thinking that because of we have done such a great job in that sphere, then that growth would never stop. What I'll tell you is that we want to grow, we want to grow in different businesses and we want to keep the margins high but our goal really is to drive growth and to get overall profit enhancements on this company.

So how are we going to do this? There are 3 areas that we have talked of. So when we talk to anybody at Sigma-Aldrich, 1 of the 3 things that we would do to fuel learning, one is improving customer intimacy. We have been a very strong product company and we still are a very strong product company. We are transforming ourselves thus to become a very strong customer element company and that means designing value propositions and how we take or complete value bundles for the customer, we'll of course we're selling a bottle of chemicals. We're using e-Commerce very successfully. I think the second area is expansion of products and services and we will talk about that -- Frank will talk and Jim will talk about some of the things that we are doing to expand our product and services so that even in mature markets in the developing -- in the developed markets, how we can see some superior growth. And the third one is obvious, it's accelerating operational excellence. As I said, when I came here a few years ago, there were a lot of opportunities we've been pursuing and we've been making our supply chain a lot more efficient. We have a product and global procurement effort, we are doing more strategic sourcing because we don't manufacture all our products, we do about 60% so all of those efforts are going to be very important and they are going to help us to get [indiscernible] profitability where it is and maybe even expand it.

So if I just talk a little bit on these 3 terms, just a little bit. If I look at our customer distribution and how we are thinking about our customers. So if you look at this, what do you find? We have over 1 million customers individual customers. We have probably over 100,000 customer accounts. So if you look at our customer accounts, I would say about 2/3 of our business, and this is -- about 2/3 of our business is down within 10% of our accounts. And in fact, if you look at this, less than 1,000 accounts of our customers buy even more than $1 million a year, which means we have 99,000 other accounts of people who are buying less than $1,000. And so we have a very different game plan for the big guys and the small guys, right? So we are very focused, we have a solutions approach for our large customers. We do solutions selling, we bought our sales force, our marketing efforts that are very, very geared towards how to grow even further with these large customers. And then we have the full area of the small customers, very much like Amazon that for the most part they're invisible, so the e-Commerce channel is very important. The transaction scene is extremely [indiscernible] and so we've got -- the work that we are doing there is how do we get more new customers, how do we get a bigger share of their wallets and I'll tell you there's some very exciting things that are happening. And we'll keep you posted on sort of the progress we're making, but I just want to give you a little idea of the distribution when you work with a company like Sigma-Aldrich. We have some tremendous trends. We have a great distribution. I talked about the diversity, this is the diversity that we have with our customers. Shaf Yousaf, who is our Chief Marketing Officer, is going to come here in a little bit so I'm not going to talk a lot about what we are doing in the e-Commerce side but I can tell you our strategy is to keep our channel -- our website simple, very easy to navigate, we've just re-did that this past year. We want to make it very relevant for our customers so they can search for the constant, we want the search engine to be very simple for them. It's -- our website is becoming personalized so we can actually follow even an invisible customer that we can follow their preferences when they come to the site for-- so the next they come we have a more tailored offering and the right hook. And then collaboration with the B2C or B2B.

The emerging markets, again this is part of our expansion of products and services. I'll tell you that in 2008, we did about $400 million of sales. This past year, we did about $580 million and we are well on our way, by 2016, this will be over $1 billion business and this is organic. So I'm not talking about if we decide and elect to make acquisitions in this marketplace, they would just add on to that and so we've got some really-- as I said, I was in Asia for 2 weeks this month. We launched 3 new sites. We launched our facility in Wuxi, I know some of you have been there, that's completed and they're going to start packaging and shipping product out of that. I was in India where we have expanded our packaging and distribution center in Bangalore. We inaugurated our site in Taiwan for High Tech facility. It was really a very, very state-of-the-art facility and at all of these sites, we had hundreds of customers who came from different places. So just -- we are very, very excited about what we have got going in some of these countries.

On the operational excellence is blocking and tackling, of course there's a strategic element in this, because we clearly recognize while we have a number of sites that we also have the opportunity to optimize our footprint. Two years ago, we did -- we announced some restructuring, we closed a few failities. We have taken some overhead out, that's going to help us improve our profits. And frankly it also helped us improve our service to the customer because we have just got a lot more efficient. I would say something here that we probably have more opportunities and we continue to look at that, we look at our footprint. Strategic sourcing is becoming even more important for us. No longer can we just look at the places that we're -- India, at the moment or all corners of the world. But again quality assurance and quality control is very, very critical and we believe we have some great strength and we can develop strategic solutions and still offer the same quality level. Regional distribution efficiency and recent consolidations around the distribution and warehouses and then operating expense efficiency. We don't believe that as we grow in this company, the top line, that we have to grow the operating expense at that same rate. So it has the natural impact of expansion of margins without us doing much, because, again, this company has-- the contribution margins that we make on our products are pretty good. And so thanks to us, we don't change that much when we add, sort of the same[ph] unless we have a certain one where we have to add a new facility.

So how do we think about investing our dollars? If you look at that, clearly, we are funding organic and inorganic growth, that's the primary role for us using our cash to make the investments again, remember, for growth. And we are investing in innovative platforms where it make sense. And we will talk about where does it make sense for us to invest in innovative platforms. We are not a company that has that $1 billion on 1 technology platform, that's not been the DNA of Sigma-Aldrich. But I'll tell you we are betting on many, many small platforms and that's the portfolio boost that we have used very successfully. We are also investing in the whole laboratory science space, and the research space. Most of the geographic expansion I have just shown, expanding different product categories that I have talked about. And the commercial market. This is where SAFC plays. We're investing in services where it makes sense and we talked about our Bio line. And we continue to invest in a unique manufacturing capability, which is really, at the end of the day, very core to our success and being differentiated in this space.

And having said that, clearly, the other uses for our cash will obviously remain in paying dividends. We've paid dividends right from the start from the time we went public. We've been growing that dividend successfully every year and we don't intend to change that thinking. Share repurchase when it makes sense. We've been doing that in some years we do more, some years we do less. And frankly debt reduction, which is the cost of interest rates are and cost of debt is the least attractive thing for using our cash. Inorganic deployment of capital. We have in the last 12 months or so, we have added about $170 million in annual revenues from the acquisition of several companies. You can see we acquired Cerilliant and RTC, 2 companies in the analytical space. And that has given us access to different markets, different products, into forensic labs, environmental [ph] testing, in diesel and largely U.S.-based companies and we're frankly very excited about taking all of these products, it's beginning to happen now. And take it to the European markets and down the road from Europe and even into the Asian market. These [indiscernible] and acquisition that we made in Rio, in Brazil last year and I think that's going to be terrific because we're going to be taking some of the products and the businesses to other parts of the world and expand the geographic footprint. And then BioReliance, quite frankly, that's the most recent one, we are very excited about what we can do both in terms of the synergies with customers but also the technology platforms. And I know-- I think Charlie and Jim have a very exciting story to tell you on that.

Just one slide down on 2011. I think we had a good year in 2011. The company made a real solid progress despite everything that was happening around us. We grew 10% year-over-year in sales, pretty much all our metrics were up. Our operating income and margins were up. We generated about $100 million more in pretax profits on a little more than $200 million in sales. Our free cash flow was strong and our return metrics are all very strong. So it was a good, solid year in 2011 and we're, frankly, looking forward to a good, solid year in 2012. We did a number of things but clearly some of the work that we did is localization in the emerging markets, some of the acquisitions, some of the highlights and we worked hard in that and hopefully they will pay a dividend starting this year. As I said, we've made acquisitions we are very excited in Asia. Service level is at all-time high in the Asia-Pacific regions, which have really fueled even more growth for us. Our E-Commerce business, our revenues grew 10% through the channel and we worked on a number of new products that are really can't stand here and talk but I know Frank's going to give a little glimpse and I think we made some real solid progress there. I thought this might help you think about our growth. So let me just take a minute because I know for those who will try and put this on an Excel spreadsheet this might help you. If you look at,on the left side, our research markets and we've divided that between the developed markets-- by the way that includes Japan -- again, just research. Our innovative new products, truly innovative new products within research makes up about 17% of the total company, that's about 25% of research, that's where clearly we are seeing some significant growth. Mind you we have made some assumptions here around growth for each of these segments and this is long-term. So if you look at that, this segment should easily long-term grow 6% to 8% or higher. If you look at that Traditional Reagents, Kits, Essentials and Labware businesses makes something about 20%. You're under no illusion that this business is going to grow at about 2% to 3%. Again for planning purposes, we assumed that we would grow this at CPR {ph] market, although clearly I'll tell you, our internal plans are to grow much faster than this. And then if you look at the emerging markets, even though we have been growing faster than the 10% to 15% that I have put here, though we've been actually going over 20%, because long-term what happens if [indiscernibly] slow down, assume it grows at only 10% to 15%, and we assume that. And then we look at SAFC on the right side and clearly we believe we have a game plan to grow that consistently at 8%-10%. And when you boil all that down and do the math in terms to organic growth of 6% to 7%. You could argue that we may have been little conservative here, because we are going much faster in the emerging markets. We feel pretty comfortable that the plans that we have put in place of the company and the things that we are driving, whether it's through the customer value proposition, the expansion of products and services, and even operational excellence of, which by the way not only enlisting [ph] faster but also but helps in customer service. We see this is very doable and on top of that if we other 2% to 3% in inorganic growth, Walden, which is what we expect to do, there is no reason why this company shouldn't grow at about close to 10% a year and that's our plan. We are working on that and I thought this might help some of you [indiscernible]. So as I stand here, I think we have a very bright future. We know that there are uncertainties, there's no question. If you put a real short span, you can say what's happening with academia, is the funding issues, what's happening in Europe, what's happening with Pharma. I think we have looked at all that, we've looked at the risk, really we understand that will be some years where there will be more headwind, where we believe that what we have, which is both the scientific knowledge and the ability to service the customers through a really first-class distribution logistics network, the innovation that we're doing, the personal [indiscernible] advantage in the emerging market, we believe that we have a tremendous position. We have a great diversity. There is no product that is more than 1% of our revenues or one customer that has more than 2% of sales, that gives us a lot of leverage. We have a great global footprint, as I've said, we have a track record. So I can't stand here and say when you look at it's not just 2011, not just the last 5 years but you look at the 35 years, we've had a great track record. And again, financial position is strong. We have the ability to make investments in areas that we want to invest, and clearly we will continue to push all fronts and deliver what we have to deliver. Finally I'll say, you're going to meet part of the management team today as we present, we have a highly energized management team that's up absolutely excited about delivering to our goals. So with that, I'll come back later on we have a Q&A session but I'm going to pass it on to Kirk, I probably exceeded of my time here. Kirk, it's all yours.

Kirk A. Richter

Thanks, Rakesh. What I wanted to do in the financial review is just expand a little bit on Rakesh's overview of our 2011 performance and probably more importantly, to all of you, what we expect for 2012 and beyond.

If I were to summarize 2012, I'd say the growth will be largely in line with what we achieved organic only in 2011 but we do have the extra contribution from 11 months performance from the BioReliance acquisition that we did right at the end of January.

If you look at again, at our track record over the last 5 years, you can see that our top line growth was in the 7% range. We think the unique model of capturing both product and geographic growth opportunities are still optimizing the contribution from our established products, enables us to continue to exceed market growth.

Our operating margins have improved from 22% in 2006 to slightly over 26% that we reported for 2011 with our net income margins largely matching that growth from 15% in 2006 to 18% in 2011. Our EPS growth continues to be roughly 2x our underlying sales growth, and that's something we intend to continue as our underwriting markets and the initiatives that we've added will drive not only our growth at above market rates, but our goal of driving our operating margins at least another 100 basis points higher than what they were at the end of 2011 over the next several years.

If we look at our full year 2011 results, our sales hit $2.5 billion, which is a new record for our company. The organic growth was 5%, that was supplemented with a 4% currency advantage and 1% from the acquisitions that were done in 2010 and 2011. Our operating income increased by 17% on a reported basis, 13% on an adjusted basis and that represented a 50 basis point improvement in our adjusted operating margins. And our net income and our EPS grew largely in line with that operating income growth on both a reported and an adjusted basis. Our free cash flow of $391 million for 2011 was right in line with our expectations for that year. Give you a little more detail, but it's right online also with our target of achieving $2 billion of free cash flow over a 5-year period.

If we look at a little more detail on our sales growth, our Research business grew organically in the 3% range and is pretty consistent across the quarters, each of the first 3 quarters of 2011 grew organically at 4%, the fourth quarter was off a little bit as we saw some concerns about government funding and the impacts of some consolidation. Our SAFC business was a little more variable by quarter. It grew anywhere between 2% and 16% on an organic basis across the quarters. But if you look at the dollar sales, they ranged between $180 million and $185 million per quarter in 2011 with us finishing 2011 strong with the fourth quarter being that $185 million that I mentioned. So overall, organic growth of 5%, total reported growth of 10%.

If we look at some of the contributing factors for that 50 basis point improvement in operating margins, we started the year in the mid 25% range. FX gave us a small advantage but that was largely taken by the red box that you see there, that was dilutionary received from our acquisitions, more for urges accounting prices and from actual operations. But our price volume and our other performance areas did boost that by 4/10 of 1% and then we also continued, as Rakesh said, to get some efficiency in our operating expense area to deliver the 26.1% operating margin for all of 2011.

If we look at some of the activities that drove that, Rakesh talked about facility consolidation, that was mainly in our cell culture area with 4 production facility, consolidations where we've moved our European management team and Mike Harris, would headed that up, is here with us today and will be available to you later. But we had our management team in Europe in the U.K., in Germany, in France, in Switzerland, they are now all consolidated at our location in St. Gallen at this point.

We also continue to see opportunities to move our sourcing closer to our customer. Heard you're going to hear more about this from Eric in the Asia-Pacific, Latin America region. And then finally, we continue to see a large benefit to our operating margins from our supply chain activity. This isn't something new. This is something that we've actively focused on from 2007 and we still have more activities to go to continue to take advantage of that.

We continue to expand our distribution in emerging market. We've expanded our capacity in both China and India and the added capacity in Brazil with the Vetec acquisition. We also are consolidating distribution in North America moving in the direction of having a common distribution center in the Wisconsin area and back-up facilities in St. Louis. And then finally, we've had that 400 mark basis point improvement in margin over the last 4 years, half of that's come in 2010 and 2011 and that's something we expect to continue. We look at our free cash flow, I already talked about the $391 million. Net income was the largest contributing factor. We talked earlier about increasing our working capital to beef up our service levels, particularly in Asia-Pacific and Latin America. And then our capital expenditures were slightly higher in 2011 to support the expanses in China, India, and the new Hitec plant in Taiwan that will come on -- that has come on-stream just recently.

If we look at our guidance for 2012, as I said, the organic growth will be largely consistent with what we achieved in 2011 at mid-single-digit growth, research probably pretty consistent across the quarters, low-single digits in the first half, mid-single digits in the second half, SAFC will be a slightly different story where we have low to mid-single digits in the first half followed by low double digits in the second half. In fact, we said in our first quarter conference call, that it is very likely that we'll show a flat performance with 2011 for that SAFC business in the first quarter of 2012 but begin to ramp that up in the later quarters of the year particularly with some of the advantage we see from that new capacity in Taiwan.

Overall, our 2012 EPS guidance on a reported basis will be in the $3.90 to $4.05 range. You can see some of the factors that influencing that, BioReliance being a positive contribution of $0.05 to $0.07, CAPEX being a negative this year of $0.15 and tax because of the advantages we saw on a one-off basis in some regenerative adjustments last year, together with the fact that our U.S. government has again taken the R&D credit off the table. They tuned on that particular one, if it follows past patterns, that may well likely come back to us later in the year, and then free cash flow in excess of $400 million in line with our goal of hitting that $2 billion over a 5-year period.

If you look at our longer-term goals and just restating what Rakesh said, we'd like to hit 6% to 7% organic growth. We'd also like to add to that with inorganic growth through our M&A activities of another 2% to 3% each and every year, that may not be consistent across the years but over the longer term, that would be our expectation on average. Our operating income improvement will be at or above the revenue growth. As I said, we've got 100 basis points left in our operating margin enhancement activities that we expect to accomplish over the next several years. Capital expenditures remain in the 4% to 5% range if you were looking at roughly $125 million. And then overall free cash flow, the goal of hitting $2 billion over 5 years. The 2012 plan is consistent with the plan that we developed several years ago when we introduced the new product in geographic initiatives and what we expected from our M&A activities.

So that's a quick financial overview. At this point, I'd like to turn it over to Frank to begin the review of some of our Research business unit performance. Frank?

Franklin D. Wicks

Thanks, Kirk. For those of you I haven't met before, I'm Frank Wicks. I've got a background in Biochemistry. As of June this year, I will have been in this company over 30 years. So I have seen a lot of the changes, and I'll just tell you it's been a tremendous ride so far and I am looking forward to seeing that continue. I thought what I would do is give you an overview of the strategy for the Research business and how we're going to grow that over the next year and further longer-term look, and then Dave Smoller will cover our innovation and give you some examples to get an idea of what we're doing there. Shaf Yousaf, who many of you might have met about 4 years ago took a slight detour for 4 years to another company but has rejoined us as our Chief Marketing Officer, and he will talk about our eBusiness. And then Eric Green will give you what's going on in emerging markets and that'll wrap it up for what we're doing in the Research business.

You saw in the slide earlier with Rakesh. I want to start out with just the strategy statement on here. It has conveniently provided a broad portfolio of trusted, high-quality, science-based solutions for the research labs and applied market. Just a few words I want to highlight here. Most important word is trusted. We've been serving our customers for over 75 years, and as you look over that period of time, the ability to produce high-quality research reagents consistently every time is what our customers need. You don't -- as you're doing experiments, you don't want to introduce other variables by having different consistency or quality each time. So that is a very, very strong point in the loyalty that our customers show to us because they know they can depend on us. The next word that's most important on there is convenience. Just think about yourself, how when you get into whether it's a grocery store line or a e-Commerce site, that hourglass is clocking or your line is long, you get frustrated. And our customers are no different. They want the convenience, they don't want to -- they want to find what they need, to be able to order it very easily and have that the transaction be just very easy to go through.

But also, what we've seen is if you look at our strategy even 10 years ago, we would've talked about adding 3,000, 4,000, 5,000 new products every year, but we're also finding our customers are having bigger challenges and these are requiring more than just a product in a bottle but more science-based solutions. And again, I'll just mention that Dave will kind of give you some examples of those, so that you get a sense of what we're talking about. In 2011, we achieved over $1.8 billion of revenue, and that was just slightly over 3% organic growth but was really led by our APLA aspect of growing 7% there. But the marketplace that we play in is $25 billion. That includes all the chemicals, kits, reagents that we sell, plus all of the labware-type items and that would be gloves, pipettes and that type of thing. So that's a $25 billion market that we play in today.

Look at the way we segment these markets. And I want to point out something. If you want to look at your book and look at the line that says Percent of Research business, there is a mistake in your book, the right numbers are on the screen, there you see that our pharma, diagnostic, hospital, biotech segment is 32% of the business, 35% for the academic government and 33% for the industrial side.

If you wish, there is single slide replacement on the table outside if you want to stick that in. They are there for your use. But we're well positioned in the market. As you look across there, each of these markets being all over 30%. At our estimated market share, there's plenty of headroom for growth as we look at the customers by segment. We also can look get this is geographically. And again, if you look across the market share numbers here, they're small, which means again, we have plenty of opportunities in each of the regions of the world. We would now segment this -- I believe, again, Rakesh introduced this to you. As you look, first of all, the chemicals, Life Science reagents and kit, these are our typical chemical standards, kits that are used in the biology space. It's also our analytical product. This is basically where our ABCM segments exist. That's 75% of the business, and that's growing at about 3% to 4% in that market. We're about 11% market share. And the 2 key competitors for that segment would be Thermo Fisher and Life Technologies. When you look at the essentials, these are the products that are the everyday use in the laboratory. It's the ones that are located in the store room down the hall in the academic place, but these acids, bases, salt, solvents. The market size there is about $3 billion and its growth rate is slightly smaller than the other segment at 2% to 3%, and that represents about 21% of our business. We have a slightly more market share there at 13%. And again, if I looked down at those different competitors, I would probably say Thermo Fisher and Merck Millipore are the 2 biggest for us in that group. And then finally in the last segment, labware, which includes these pipettes, the consumable type items, does not include instruments, this market size is about $9 billion, growing 3% to 4%. We only have about 4% of our business there and the estimated market share there is only 1%. And I would put Thermo Fisher as the number -- the largest competitor in that group.

Now just to kind of give us the foundation of our business and where we are, as I mentioned, over 75 years of serving our customers. We look at the sales and service aspect of what we do. We have 2,000 customer-facing employees in sales, marketing and service. We serve them in over 160 countries and we do this also with an industry leading e-Commerce platform. We look in our products and the innovation, we have over 500 scientists right across the ABCM discipline. We offer today over 200,000 products, and I emphasize that because this is one of the competitive barriers to entry. It's a key thing that has made Sigma-Aldrich what it is. It's the breadth of our product line that when customers are looking for whatever they need, they can come and know that they can find it with Sigma-Aldrich.

But also, I think another thing that differentiates us from many of our competitors, we are also a science-based company. We've had slogans such as "Chemists helping chemists." We have a technical support that is science-based people that can help solutions and gives the answers to customer problems. We also provide a industry leading magazine that's in the organic chemistry area called the Aldrichimica Acta that's been published for over 44 years. And so it's become a foundational magazine within that chemical synthesis area. And then finally, the other aspect of really the, I would say, good -- the strong platform that we have to grow our business is our logistics and distribution capabilities across the world. I will put it up against any of our competitors that we are stronger and especially, as we look at the emerging markets area, of having the necessary logistics to get products to our customers in the time that they expect.

So how are we going to drive this business? I think these 3 concepts Rakesh introduced of improving customer intimacy, expanding our products and service and accelerating our operational excellence. When we look at the -- that customers intimacy there, we're actually driving these solutions-based approach with our ABCM portfolio and you'll see some of these examples a little bit later. And of course, improving our convenience through our web platform. And as we look at the expanding product and services, it's maintaining, and I would say, investing heavily, in our position and leadership in the emerging markets to continue to take advantage of those faster-growing areas. And of course, we're also expanding our product breadth. If we look to even 10 years ago, we were over 100,000 products, and now we're at 200,000 products. So we don't slow down. And then we're continuing to look at bolt-on acquisitions, and there we're really looking at product expansion. So last year, as we did standards that actually added a number of new products from that aspect, but then we're also looking at capabilities, and it maybe a particular type of technology or something that we want to add to expand what we're doing. And then finally, on the operational excellence, to continue to drive our business. We're looking at strategic sourcing, this helps us with a lot of the new products. Kirk mentioned the distribution capabilities. What we've done is expanded our warehouse in Milwaukee to include the ability to ship both Aldrich Sigma items, all from one warehouse to anywhere in the world that we need it. So it becomes a mother warehouse to supply some of the more localized distribution centers. And then another important aspect to the operational excellence is the localization of supply chain. What we mean by this is that especially on products where it's either hard to ship or it is more commoditized in these emerging markets, we're localized in the supply chains where we source locally so that we can sell and compete locally.

One other aspect of, I would say, the growth is also being able to take our ABCM focus on a product basis, but then looking into other markets that we haven't traditionally gone into before, and that's leveraging our -- for example, like our analytical capabilities into forensics labs, environmental, food and beverage areas. What's exciting about that is we see that these markets are actually growing probably 2x what we see happening in the research market. So what that generally means is that sometimes it's just a reconfiguration of a product that allows us to compete in that marketplace. It may be just a different size and/or kit that may be required to make it more useful for those types of customers. And also, these products eventually we look for opportunities to take them commercially into our SAFC business as well.

Just to kind of remind you again about the ABCM strategy, with those products and how we look at them. First one being analytical. Analytical products are products that we try to answer the questions of how much, what is it and what kind of purity do we have. And so those kinds of products can be separation consumables, they can be standards that are needed and they may be other types of analytical reagents and solvents. We see the real growth here is this global focus on food and environmental safety, and also, I just would call it generally the concept of quality as we -- different industries have tried to be much more strategic about their sourcing. It's having that reassurance that the products, no matter where you get them, are of the quality nature. And there's been some scares in the past where certain products were sourced from China. There was a heparin scare, there were some other things like that. So the real driver here is to make sure that we can provide the products, that these things can be tested and reassure our customers that they are of the highest quality.

If I looked at the other driver here of it's really in these emerging markets. And if you looked down at that list of competitors, I would highlight as the strongest ones for the analytical segment as EMD which is Merck out of Germany, Waters and Agilent probably be in the strongest of the group there.

Biology. What we're looking at here are products that help us understand what's going on in the cell. Our traditional biology here would be made up of the 2 segments of molecular biology and biological reagents where the innovative is the cell biology, protein biology and animal biology. The growth driver here really has been the switch and the trend in the pharmaceutical market going from small molecule to large molecule. And also, the increase in safety and toxicology testing. The competitors, probably the strongest one in this group is Life Technologies. On the chemistry side, I would say this is probably, our of all of our segments, the strongest franchise. And what I mean by that, we have probably have the largest market share. We probably have also the strongest brand recognition within this being our Aldrich brand. You can see the various segments as we manage this internally on the slide. But I would say it's also one of the ones where we have our biggest challenge, and the challenge here really is the consolidation in Pharma, the reduction of the R&D footprint that we're seeing. We're able to capture some of this business as it moves east and goes into CROs, but it's not a full replacement. So part of our strategy here really is to be able to improve the ability for our customers to find a lighter variety of chemicals, whether they're ones we offer or ways that we can help source them for them, and give them in a quick and easy fashion.

On the material science side, it's really just a subset of chemistry because it's still chemical synthesis. But it's really the applications into the materials area. We're looking at materials that can be everything from materials used in medical devices to those types of materials that are used in electronic. So it's really the application, and the drivers here, of course, is the growth in alternative energy, the focus in these areas, bioengineering, and just, I would say, the expanded material spectrum. It seems like almost every area of science has some aspect of new materials that are necessary. Key competitor here would be Alfa Aesar is actually a subunit of Johnson Matthey as one of the biggest competitors in this space.

And finally, the last segment is our essentials and labware. This is a critical part. If you just think of about the grocery store and where the milk, eggs and butter or whatever those common things are, it's not only a door opener but it's something that as we are able to provide these things and a high level of service and quality, it allows the other products and our more specialized things to come along.

In the labware space, as we mentioned before, we have very small market share but we also see some opportunities in that, especially potentially in the emerging markets, broadening our focus there as well. We see that emerging market as the key growth area in this area, and also continued focus on the food and environmental safety being a key driver.

So how do we approach our growth strategy? Try to kind of walk you through how we're looking at each of these things. When we talk about a solutions-based approach, you can think of some, basically, solutions being in 4 types of buckets. One, I would say is -- I'm calling cutting edge technology. And an example there is our zinc-finger-nuclease technology that we have today. Solutions based on proprietary technology would be something like being able to purify rare earth elements from scrap. We do collaborations with scientists, and here we created a high throughput vitamin D assay for a large healthcare company and unique manufacturing technologies. We're one of the largest world's producers of stable isotopes, and its very unique manufacturing technology that allows us to do that. And Dave Smoller will go into some of these examples here just in a moment.

Second thing in it is our customer convenience through our e-channel, Shaf is going to give you a much deeper look at these, but again, how important it is to continue to improve the look and feel. And I think one of the most important aspects of this is our ability to actually customize that to you as the individual, which may mean, depending on your buying patterns, there are certain things that you want to see when you get to that first stage versus somebody else and our ability to do that and tailor and customize that for them. We continue to expand our web content. When scientists need to do an experiment, they need to understand what information so they can design the experiments appropriate, we want them to be able to have a single destination place to get the information they need. Localization of web content and everything from translation, so that they get it in their language that they need, but also it may mean, culturally, they like to see the screen different than another culture does, and our ability to be able to do that to deliver that to our customers. And of course, the final thing there is the search capabilities. If you've got a search engine that is able to bring up what that person is really looking for and not 500 other things at the same time, that's what we're after and we continue to work on and improve those engines to be able to deliver with the customer is asking for. We have said of the other aspects of the strategies is expanding our breadth and our services. Just to give you some examples, antibodies, we continue to add well over 55,000 antibodies now that we offer to the marketplace. The last time we did this meeting, we talked about expanding our standards. We wanted a strategy, as we've said, become the Aldrich of standards, because Aldrich is sort of a household name to the organic chemist. We wanted set our standards to be the same kind of thing. We are able to acquire both RTC and Cerilliant. This added 5,000 more standards to our already fairly significant standards line. And I'll just mention again that Cerilliant and RTC last year, we saw over 25% growth in our first year, when we look at those 2 together. I mentioned something called the long tail here, especially in the chemistry area, I've said since it's challenged, the idea of providing a much greater portfolio in an easy fashion and these are products that they may only want 2 or 3x a year, and how can we provide them in a convenient fashion. And we're providing, basically, web tools to allow them to search, actually, literally millions of compounds, identify sources and being able to deliver that for them.

Our Asia-Pacific and Latin America distribution, as we've said, we've got a very strong footprint in that part of the world. And what we're trying to see is how can we leverage that with even broader portfolio products that we might provide to the rest of the developed world, because we feel that we have the footprint necessary, and maybe the reach to the customer that most of our competitors don't have. And so we think we can even broaden our reach into these customers with even more products. We'll continue to review bolt-on acquisitions, at least trying to find one or 2 of these every year for just the Research business, and then using our technology into our most recent acquisition with BioReliance and taking some of the models that we've built, especially on the animal side to improve that toxicology business within BioReliance. The third leg of the growth strategy is establishing a leadership position in the emerging markets. And I mentioned this localization of supply chains is very important. This is building on the Wuxi facility, the Bangalore facility and the Vetec facility in Brazil. We sourced locally in these markets' package and delivered to the customer in a competitive fashion. And this may require also the launch of what we call the value brand. It would be maybe a different name on the label, but endorsed by Sigma-Aldrich so that we can compete in those more commodity-type products. And finally, as I mentioned, we've expanded our distribution capabilities to -- with a broader range of products in this part of the world. On the bolt-on acquisitions I mentioned, Cerilliant and RTC, this is the concept. We've looked at our other ABCM areas and what product lines, capabilities, technologies can we have. We probably looked at, I would say, 20 or 30 different companies last year and ended up with the 2, of RTC and Cerilliant. So there's a continual review going on to see how we can continue to expand our portfolio. With that, I want to introduce Dave Smoller, our Chief Scientific Officer.

David A. Smoller

Thanks, Mike. Thanks again. I'm David Smoller and been here almost a decade. And yes, it's really great working with Frank, he's been an engineer, in 30 years, it's pretty great to have a mentor for that time [ph], so that kind of continuity and loyalty to the company. But let me go and start talking about innovation and research, about -- as mentioned before, about 25% of our sales comes from this sort of innovative or novel technologies and products. And as we said before, these are the areas where we think are going faster than markets, probably 6% or 8%. So today, I want to point out a few of the innovations or examples of innovations at Sigma. Unfortunately, I only have about 10 minutes. Anybody who knows me, I'll talk for hours about this area. So at lunch, feel free to sit down and get an earful on innovation, I'm here to talk about that for sure.

I'm going to point out a few things around sort of traditional ideas of innovation around new products, but innovation is within all parts of Sigma in manufacturing, in products. And so I'm going to talk and touch about different parts of innovation throughout Sigma. In the past, we've talked about the unrivaled scientific knowledge at Sigma, we have over 2,700 employees with degrees in chemistry, biochemistry, engineering, other scientific disciplines, with over 390 of those having Ph.Ds. So we have capabilities in science throughout the company, technical service, R&D, sales, so innovation is a key capability through our day-to-day functions within Sigma.

So first example is in our analytical initiative. As Frank mentioned, they're really taking us far as to making solutions for our customers. And one of the areas, of course, is in the applied markets and diagnostic. This example is a major national healthcare laboratory had a problem with their vitamin D test, they wanted to improve the sensitivity, they're doing thousands of vitamin D tests a day. And so they needed a high throughput way of really improving their sensitivity. The problem with their vitamin D test was that in blood, there are phospholipids that really confound that test. So they needed a way to extract or remove the phospholipids from the blood and then be able to separate the vitamin D, put it on Mass Spec. And so we combined a couple of our innovated technologies and analytical initiative, our HybridSPE Phospholipid, 96-well kit. They'll do 96 samples and remove the phospholipids and un-confound that test and then separate the vitamin D within our Ascentis Express HPLC columns, and so we ended up with this really highly sensitive vitamin D assay, at the same time, not losing these high throughput capabilities that they needed to do thousands of tests.

The other area that we focus on in our strategy is biology. I think a lot of us in this industry really know this continuum of lead to market. Unfortunately, when you go from a lead to market, it takes about, oh, 15 to 20 years from beginning to end and about $2 billion. The other unfortunate thing is that 89% of the drugs, once they are put into a human being or on a human trial, fail. So what does that tell you? It tells you that the pre clinical areas, the cell-based assays, the animals that they test for efficacy and safety are not predictive. They just don't work. And so it really is a key solution for us to find a way -- to find those more predictive preclinical models to be able to engineer cells in animals to be much more predictive like a human. And to fail early, fail fast, you'd rather fail in the early stages because it costs over $0.5 billion to take it through human trial. So fail early, fail fast and so find a way to do that, and until the solution, of course, if you've been listening to a lot of my talks or the discussions about these technologies is the zinc-finger-nuclease technology. And so what this technology is about is really about editing the genome of a living cell or animal. I know it sounds Frankensteinian, but you can go in and delete or insert things into a gene. And by doing that, we can make a new models in cells and animals, in this case, for better efficacy and safety profiles. And so the example I have up here is just some of our workaround transporters, this is how drugs are absorbed or transported through the gut, and understanding that is very important. We have cells and base assays and animals that help you understand that. Anybody sees what's going on with drug-drug interactions, and how things are coming off and failing in the market. It's really about understanding that transport, how those drugs are interacting and coming through the gut. And so the FDA is really asking to really understand what's happening inside of the cell. And so we can do that now. We can knock out these transporters, we can understand what's going on in cells, both in cells and in animals. And so we have both knockouts in sales and in animals, and so we have animal models that are hopefully more predictive of how things are transported.

The other thing we can do is look at technologies like Induced Pluripotent Stem cell. And so, if anybody is reading the literature, this is about taking a stem cell and making it pluripotent. I think you're all going to get a continued education credit in this for all the science I'm giving you. But the key here is that when something is pluripotent, you can push it toward any tissue you want. So you could push it into a cardiac cell or a neuron or a liver cell. And once you couldn't do that in a petri dish, take a cell and make it into any tissue you want, you can engineer it. And so that's what we've done, we began engineering it, and I've got movies now. I can find -- this here is a -- this green cell here is tele-engineered by putting a green fluorescent protein from a jellyfish into the genome of this cell. And if this thing is running, it'll slowly start to beat. It's not yet a fully mature cardiomyocyte or cardiac cells, starting to beat. And what's going to happen is just that it's going to eventually convert itself to a mature cardiac cell, and it's going to beat in a dish and the green is going to go away. Very cool, right?

More importantly, you can -- this is a prototype of what you can do by taking that green fluorescent protein and possibly putting it in front of a gene that is for tox or safety. So when you throw in a chemical and it's toxic, maybe that cardiac cell will turn green. And so again, you can do simple assays now in our imaging system or our plate reader and understand and predict tox with a true cardiac cell from a human in a dish. So this is very exciting stuff. And it's all being leveraged and enabled by the zinc-finger technology.

So I said I'll talk about innovation throughout the company. Here's an example one in manufacturing. Today, we needed a process to deliver and to make very high, hazardous building blocks, like diazoacetate. Diazoacetate, if you put it in a normal batch, I mean if you think of a big reactor, a big kettle, you're having large molecules coming together and reacting, when that happens in a hazardous stream like an explosion, you'd rather have little tiny amounts coming together because of it's -- as a problem, you don't have the same kind of hazardous issue. So how do you do that? The way you do that is with the streams. So by doing reactions in a tube or a stream, what we call a Continuous Flow Manufacturing, we can develop large quantities of these hazardous materials. And so in Milwaukee, they've built this system. We have our own proprietary technology and proprietary process to do Continuous Flow Manufacturing for this chemical. And it's assessed by this large amount. We can make over 100 kilograms a year through this Continuous Flow Manufacturing. So again, an idea that came through with the scientists in production.

Another area is around, I think, in a collaborative fashion, is how we leverage our technologies, our reagents with third parties and academics. This is an example of -- in cancer, it'd be really great to be able to image metabolism in cancer. To understand benign versus malignancy, it's about metabolism. Cancer cells, when they're malignant are metabolizing faster. And so if you could image that or see that, you could determine the difference between a benign tumor and a malignant tumor in a simple energy modality like MRI. And so this is a collaboration between GE and ourselves and 6 other labs doing research studies in UCSF, University of Cambridge, Stony Brook, University of Pennsylvania, Chang Gung Memorial Hospital in Taiwan and Yonsei University in Korea to develop this modality, this imaging program to get more sensitivity to look at prostate cancer. And so what we've done is take in our stable isotopes and made a substrate with pyruvate, so C-13 pyruvate, which will be converted in metabolize the lactate in the tumor. And what was done is with GE, we've basically activated this substrate, we microwaved it, hyperpolarized it. It is put into a patient, and then that C-13 goes into the tumor that's going -- that's metabolizing via elevated levels of lactate, and the C-13 is transferring the lactate. Now you can image it inside an MRI. Before you couldn't. This increases sensitivity by a factor of 10,000. It's amazing stuff. And Sigma gets to participate. This is why many of the scientists get up in the morning, because we can enable these kind of things and change the paradigm in diagnosis, and hopefully, treatment of these disease.

The next is Materials Science. Even simple things like how do we supply our customers with things that are very hard to get? So Rare Earth Elements are used in radiation detection and medical devices, electronics, lighting. 97% of the global demand was supplied by China. China decided to restrict the export by 72%. So how do we enable our researchers to get that material? And so what we did in our site in Urbana is develop a process to extract Rare Earth Elements from scrap. And so this is, again, scientists getting together thinking about how to solve a problem, using our unrivaled scientific knowledge and we're able to purify Rare Earth Elements 99.9% purity from scrap and deliver this to our customers. So again, very exciting. So I hope you've got a little bit of idea of the little bits of innovation in the few minutes that I've had. But I think you can see that diversity of our capability within Sigma, from manufacturing, to substrates, to products with innovation, from engineering to manufacturing. So with that, I'm going to introduce Shaf Yousaf, our Chief Marketing Officer, and he's going to talk about our key business program here in Sigma. Thank you.

Shaf Yousaf

Good morning to you. My name is Shaf Yousaf. Frank Wicks mentioned that I took a 4-year, I'm now back on the straight and narrow, so good to be with you this morning. Now I'll talk a bit about our website. So the great vision that we have for our website is to be the leading e-Commerce destination for the scientific community. That means providing in-depth technical information, that means providing a frictionless e-Commerce engine, and then more information for post sales support. So our customers come back, and come back, look at the product that they have bought, look at the various protocols that were used with that product and help troubleshoot. And that information, then, is also suggestive of further research, and therefore further purchases.

So the goals that we have is to keep our information differentiated. We believe that the depth of this information is something which differentiates us from our competitors, the combination about -- of the birth of breadth and depth of the information that are now serving e-Commerce engines. This is unique to us. As we present that to customers, we aim to drive the initiatives that we define as ABCM, and you're all going to see that segmentation, that structure on our website.

Another key goal is to personalize the online user experience of both the scientists and the purchasers. So these 2 customer groups have very different needs and we've done a lot of research, extensive research, across the world as to how customers prefer to see their pages, and then we're also to dynamically modify the pages that they see such that it matches the needs and the experience that they prefer. A key part of personalization is obviously localization in the high-growth markets in China, in Asia, in Latin America also. We have particular needs that we aim to address, and we spent a lot of time in the last 2 years interviewing customers in China, in Asia and in Latin America to make sure their website is localized for them.

We also aim to develop new and innovative tools, to bring out tools on our website and in the mobile devices that enhance the customer experience and now can allow new capabilities that customers can use. So a quick look at our main statistics. So the usage of our website obviously, have grown dramatically since launching in 2000 but the last few years. And now, about half of our global research, e-Commerce, is transacted directly on the websites. They're no longer by phone, by fax, but by -- directly through the website. And in the U.S., that's even greater, about 56% of our e-Commerce -- of our sales come through this e-Commerce search engine. But we look at it in terms of number of visits, we now have 4.5 million visits per month to our website. That, obviously, has grown dramatically over the last 3 years and seems to grow in double digits year-on-year for the last few years also. And so the website, we would say, today, is our main technical and e-Commerce interface with our customers after passing the other interfaces, including our catalogs and our brochures, the direct mail that we sent out. So this is now our key interface and therefore needs to be, I think, our key investment as we go forward to further enhance the customer experience.

So as we looked at further modifying our site, making it more useful, there are some ground rules that we follow and they are listed here. So we aim, in our design, to be simple, be relevant and to be innovative. The simplicity we're looking at more and more unified and consistent look and feel across the whole website, across new acquisitions as we integrate them into the company and to look at going back to our customers to test each of these designs and models before we deploy them. So we have a panel of about 5,000 customers that we routinely talk to worldwide. We can go out to them, test designs before we deploy them, do in-depth interviews as well and then all of that feedback goes into the modifications that we make. And this is a process of continual improvements. So I'll show you some of the changes that we made in the last few months and particularly recently. We'll show you some of the improvements. Relevance is also a key. It's great having massive of information, but to bring it to the customers' attention at the point when they want it, the click that they expected is a little more difficult. And so increasing the relevance of this information is key part of our process. And innovation, to have tools that nobody else has that enhance the customer experience. So let me take you through a few of the changes. I mean, look at the front page. We changed that about a year ago. The feedback we got previously was that our own page is rather collected and somewhat unstructured. But you can see now, the top, you see that the key areas of the products, the service and the support and the search box is very clearly highlighted with that red background. So most of our customers coming to the homepage, 70% of them will go straight to search. They know what they're after, they will go in and search and then move on. We can see the rest of the space, we now take as what we call hero space. These are our products, services, technologies that we wish to highlight to bring to the customers' attention to get them to look at other areas that may not have thought about before. So if they know exactly what they want, they'll go straight to the search and they'll move on from there. But this gives us, at the very shop wing [ph] there, the front shop wing [ph] there that we have to highlight other areas that we would like the customers to have a look at. So a large hero space as you see in this controlled radical polymerization example. You'll learn about your CI ABCM segmentation with SAFC as well to highlight particular technologies that we want customers to have a look at. So after the homepage if you're going to search, our search is also greatly enhanced. You can see that the search box is very clear. In the left-hand side, you'll see search filters, which is a way of refining the search to get more exactly what the customer is looking for. And then the search results themselves are less collected and set out more and more exactly. When you type into the search box now, the search engine will suggest to you the word that you're looking for as you do when you look at -- when you type into Google. Many of our products have complex names, complex spellings, and particularly for international customers whose first language may not be English, this is greatly helpful, and we've had excellent feedback from them on how our more useful this particular search engine is.

So we're following a typical path that a customer would follow who comes to the front pages to do a search and then go to a product page. So our product page also is now modular than it was before. The name, the structure of the product is more clearly displayed. The information behind that product is now in a tabular format and soon as you go behind each of these tabs, you'll see more detailed, in-depth information. What they use now are also much more structured and geared towards search engine optimization, which means that when search engines such as Google come to our website using their Spyders to examine them, that they are more clearly defined such that when people search in Google, they will find these products. Our aim is that when people search with external search engines, our products will come up top on the first page. How do we do that? So the information that's presented, the depth and the relevance of it, Google looks at, the proximity of this information to the word that's being searched for. And then behind these images, so the Spyders do it -- normally look at images that we put descriptions behind these images that help draw attention to the fact that this name and this product are closely linked. So all of these enhanced the experience on Google and bring our products from the top of the list and people search on Google.

And we found now that about 25% of customers coming to these product pages, now come directly from the external search engine because our products list so highly on customer search on their search engine. So the richness and the knowledge is a key differentiator for us in the information that we present to our customers behind those product pages. Because you look at those tab, what you'll see is detailed verticals that you see on the left there. These verticals often have videos inserted that the customers can go through and learn more details about the assays and how exactly to perform them if they're looking at them for the first time. On the right-hand side, you see something which is unique to us, and this is a search tool called Your Favorite Gene, and this presents products and data in the context of the metabolic pathways. So singling pathways that customers may be studying. So from the product, you can link back into this pathway. These pathways are updated with the latest research as it comes out, and therefore, as the customer browses over these pathways, you can look at new information that's being presented by research and also link through to products that are available, which are behind those pathways, which then puts the research that the customer is going into context, and is further suggestive of other products that they may purchase. So this is cross-selling at the very sophisticated level.

Another piece of innovation that we've introduced greatly increases the convenience of ordering complex products. So this tool is called the configurator, and the example that I'm showing you here is how the configurator enables you to order only goes in a plate. Only goes a small piece of the DNA, which each have a different sequence that can be modified differently, that can be presented in different concentrations. So it's a very highly configurable product. A customer may want each well to be different. They want some wells to be empty. In the past, a typical order for a plate would take about 30 minutes to enter, whether you be online or whether you phoned up and e-mailed through an excel spreadsheet to a customer service rep. Now it takes about 5 minutes. So this is a very convenient way of ordering highly configurable products. Example here is for oligos, you could also leave a slice of analytical products such as columns where the shape, the size, the collectors, the content and the column can be very different. This is a major convenience for our customers.

So another aim that we have is to look at customer intimacy and making sure that the website is customized as much as possible to the individual need. As I mentioned, it's all very well having expensive and deep information. The point is to bring it up to the customer at the point of need. So we have an algorithm now that looks at modifying the front page that the customer sees based on previous digital behavior. So Amazon has this -- led the way in this and we are using that kind of approach to customize our website. So when the customer comes, we look at which pages they visit, which product pages they call up, which extensions they do, which verticals they look at. And from that buildup, enough information to categorize them in one of about 80 segments, so not just for the biologist [ph], but they are looking at immunology. Not just immunology, but they're linked in, in the immunology of cancer, and then we segment them into one of these actually 82 segments so far. And then if when we have enough information, that is starting a cookie, the next time they come, then the front page, the hero space of some of the ABCM information and the is customized to their particular need, and this is dynamic. So we're going to start with the front page base, this was introduced recently. And what we've noticed is that most customization, we get 2x to 3x the click-through rate from this page to the products that are behind it. So a very significant increase in relevance to the customers. The aim, eventually, is set to a segment of one where we understand the customer, where we know that their individual needs are taken care of and where their research needs are anticipated and we present the relevant information not just on the front page, but on all the pages behind it. But today, about 60% of our customers are seeing a customized the front page, and the other 40% we don't have enough information as yet and we expect that to increase dramatically over this next year. We look very closely at the customer behavior and the use of innovation such as mobile applications, smartphones, iPads and it's relatively lower, yes, but we ourselves now are making available key material on these mobile apps. So the Aldrich catalog is available on the iPad, certain analytical brochures are available also, and tools such as a tool for defining concentrations, which customers find very convenient is also available from these apps. So downloads of these are about into tens of thousands right now. It's relatively small but expect it to grow dramatically. And we will introduce more and more capabilities and tools on these mobile apps as we go forward. So large parts of customization has to do with a regional customization. So we have a strong focus on the emerging markets, particularly in Asia. And when we look at our sites, we have a strong capability to deliver in China, and Japanese in local language. So this search is available in local language in China, in Japan, so people can enter those characters into the search engines. A lot of the navigation tools are customized, and in China and Japan, a lot of the product detail pages are customized. And the local offices can base present promotions and merchandising based on local inventory and local needs because of this customization, and that's a key part of our growth for the future.

So the last innovative tool, let me present back to you, is a thing called Aldrich Bucket Select. And this is a tool that enables search and procurement for drug discovery. The customer need here is to obtain large numbers of compounds for drug screening purposes, for pharma and biotech. And this is well beyond the 200 or so of products that we provide. So in this tool, which is based on an acquisition that we did called ChemNavigator, we have about 6 million structures and compounds behind it and contractual relationships with about 25 vendors and adding more vendors every month who supply to us to this particular compound. So a customer can go to this site, search against that 6 million, decide how many thousands, sometimes, of the compound they want and then order to us and through our procurement, we will obtain those compounds, consolidate them, format them in some cases and ship them to the customer for screening purposes. So it's another example of the innovation and the tool that we're bringing to the customer that gives us a new procurement model in how we deal with customers.

So that's the range of activities that we have, and very exciting for the future. So our aim then is to keep this website as the #1 destination for both e-Commerce and intelligent information to customize it for individual needs, and to bring these innovative tools to our customer. So with that, let me hand over to Eric Green who will speak about our work in the APLA markets.

Eric M. Green

Okay. Thank you, Shaf. Good morning. It's -- I've had the pleasure to meet a few of you in the past, but if not, my name is Eric Green. I've been with Sigma Aldrich 19 years, and then the last 6 years, I've been involved heading up our International business, which is Asia-Pacific and Latin America, so I'm really looking forward to spend a few minutes with you and tell you about our growth strategy for the region.

To start with, you take a look at international, our Asia-Pacific and Latin America, it's 23% of our total business. As Frank indicated earlier, it's 27%. We just look at the Research business on a global basis. If you look at the geography between Latin America and Asia-Pacific, about 15% of our revenue is in Latin America, again, our focus markets there are Argentina, Chile, Mexico and Brazil, and the balance is in Asia-Pacific. If you look at our leading position in the marketplace, we have had a direct access, early entrance into many of the markets for several years. If you look at South Korea, Singapore, Mexico, not just the emerging markets like China, India and Brazil, but several markets throughout the region. And because of that, we have direct access through over 200 sales professionals in these markets talking with end customers, and that's how we're able to actually penetrate and identify more issues, opportunities to solve our customer problems.

And when we talk about leading distribution capability, it's more than just having a distribution center with few products in these facilities. It's the ability, if we take this room and you're sitting in PuDong today, and you pick up that call -- and you pick up the phone and place a call to Sigma-Aldrich before noon, that material will be on your bench by 4 p.m. same day. It's redefining what it means about distribution in really the key markets such as Seoul, Shanghai, Bangalore and markets throughout Asia-Pacific and Latin America. In addition, you've seen some press releases about building scale within the region, and that's clearly what we're doing. It's building scale that allows us to have sustainable growth and allows us to get closer to our customers.

Let's look at the overview of Sigma-Aldrich in the region. And today, if you look at the channel, 41% of our revenue today goes through a dealer network, so that's important to us. If you look at Japan, it's a heavy dealer-network environment for commerce. You take Japan out of the equation, it's roughly 20% for Asia-Pacific and Latin America through the dealer network and the balance is direct to end customers.

In the portfolio of customers, it's similar what you see with Sigma-Aldrich on a global basis, about 1/3 to the none for profit, for the government and academia, 1/3 to the chemical industrial and 1/3 to the pharma biotech and the diagnostics area. In all 3 areas in the Asia-Pacific and Latin America, are healthy growth opportunities for our business. So look at the portfolio of products, upper right-hand side, you'll see about 76% of our business is research and 24% of our business is in the SAFC area. You'll find that growth is throughout the traditional product portfolio but also innovative new products that are being developed out of our R&D facilities and throughout the world. What you'll notice though is the upper section of that, the essential labware and the SAFC area in the region of Asia-Pacific and Latin America, there's more opportunity for growth. We're under-serving that area and this sits really nice with our localization strategy, which I'll talk about in a few moments.

Looking at analytics in the back year, about how we have done over the last 5 years, how we have delivered above market growth rates for the entire region, about 12% at constant currency for the last 5 years and in most notable areas are China, India and Brazil, 29%, again, for the same time period. Well, in fact, if you look at the entire portfolio within Asia-Pacific and Latin America, all countries had been growing double digits for the last 5 years, excluding Japan and Oceania, which is Australia and New Zealand. From the market perspective, there's 2 components here. One is if you look at the market growth rates vary. You have low-single digits in Japan and Australia, you have mid-single digits in markets such as South Korea, Southeast Asia, Mexico and then the higher growth areas in the double-digits in China, India and Brazil. That's how we look at the portfolio. Our position in these markets vary. In many of these cases, we're #1. You look at Mexico, you look at the South Korea, Brazil with the recent acquisition of Vetec Chemica, we are clearly a leader in those particular space in the reagents and chemicals and kits component. In areas such as the China and India, we're #2 in those particular markets. What's important to note with a lot of the competitors that we've seen in the local markets aren't the traditional competitor that you saw in the board and Frank's presentation. They tend to be the local competitors that are national-focused. That's our opportunity. I mean, again, if you looked at the portfolios that they're focused on tend to be in these and tend to be in supply of provision in the labware space. Again, our growth strategy going forward will allow us to be more competitive and compete in that area and be more -- stronger in all markets throughout the region. So the growth strategy for international is broken into 3 components. It really is getting closer to our customers. Leveraging the channel, whether it's e-Business, whether it's dealers, whether it's direct access. The second area is expanding the portfolio and the third area is leveraging our operational excellence. We have a pretty robust footprint, and now we have an opportunity to leverage that and get into new areas of growth. So let's talk a little bit about our customer. We've been to building the sales force and we'll continue to do so. What we're doing at this point, we're actually putting field sales force into remote locations where you consider like Tier 2 locations in China, in India and in Brazil. So if you walk into laboratories and cantinas outside of São Paulo, you'll find that Sigma-Aldrich representatives are there working with the end customer, same thing with Lu Han in China, and also remote locations in India. And Shaf spent a pretty good amount of time talking about customization about the e-Commerce. It's more than just changing the language, it's understanding the behaviors of your customers in each specific geography and then how they've used the e-Commerce tool. And that's where we're moving towards, is how do we adopt this system, not to be universal global but to be more specific to the different market. And the third component of opportunity is looking at the value Sigma. Talk about local competitors competing in the essential and certain areas of SAFC. We're looking at adopting a local brand, give it the Sigma, the Aldrich and the Fluka-Bran habit, a small equity is in this region and we'll continue to leverage that as an endorsement to the value brand to go after the more headspace for growth for Sigma-Aldrich. So it's important to note is that each market we have has uniqueness of going after the market. So the direct access in our major cities throughout the region fell to using the dealer network in particular markets. So we have a program in place with the dealers, it's called the dealers as partners. You go on to Japan, we have reorganized our dealer network, we have put incentives in place and we have a partnership where we actually know the end customers, but transacts to the dealer network and it is a collective way to be successful in that market.

And we talked about expanding the portfolio. Today, if you walk into a laboratory today and looked around in the bench, look at noncapital items, you'll find about 50% of the product is what we can service today. The other 50%, we have not focused on in our particular region, and this tends to be in the areas of lab work, bench top, small bench top equipment. And this is an area where you believe we can penetrate because of our global -- or our presence in the region. And we'll leverage our access to direct access with customer. We have a scalable distribution and logistics capability, and we have a channel management program whether it's direct, eBusiness, again it's scalable to add more products through it. And more importantly, we talked to our customers in the region. You'll find that they're looking for a partner to solve these problems. These problems have been solved in some form or fashion in U.S. and Europe, but in Asia and Latin America have not been solved at this point, and there is an opportunity for Sigma Aldrich. The third area -- the third drive for us is operational excellence. Yes we're going to continue to build inventories, we're continuing to drive the service levels to new record highs in the future, we're going to continue to redefine how you deliver products to the customer same day, next day in all the major geographies throughout international. But more importantly, if you look at what we're doing, we went from, in the last 5 years from an import model to be able to bring all the Sigma Aldrich materials into the market and drive service. Now we're moving towards the next layer of growth of actually localization. And what that means, it allows us to go after areas that the local competitors are able to penetrate.

Our brand, our position will allow us to grow more aggressive. We acquired Vetec last year, which is a manufacturer, packaging and QC facility that has been the #1 domestic player in Brazil for a number of years. With an expansion in Bangalore, the 10-acre campus has made manufacturing, packaging, QC, distribution. When I talk about quality control in these facilities, it has the same standards as quality control out of our facilities in the U.S. and in Europe, its consistent capabilities on a global basis. And then more recently, we just opened up a facility in Wuxi. It's on a 20-acre campus, new packaging QC facilities, again, that we'll source, give the assurance to the customers in the region of the Sigma-Aldrich Phil Rose will talk about the Taiwan expansion that we just opened up 2 weeks ago in Taiwan. Critical point here is that we believe, with this new footprint and expanded footprint in the near future, the dependency on an import model will become less. We believe that the competitive will go after more market share, and sustainable growth long-term will have over 1/3 of our business will be through source-manufactured QC locally in region in more regions for the next several years.

So to summarize, if you take a look at -- we've broken these -- the portfolio into 3 buckets, the high-growth Brazil, India, China, the rest of International and then Japan at the end. In 2006 and 2011, you'd see the transformation you've seen with the high growth areas. And then in 2016, we believe, based on the market growth outlook of each segment, our penetration, our current plans, our growth strategy, we believe that above almost 50% of our business in this region will come from free markets. And that is consistent with all the trends we see with our customers and the research funding on a global basis.

So I want to thank you for your attention and I wanted to extend a personal invitation to anyone who would want to visit one of our facilities in Asia, meet our management team. We have a dedicated leadership team, and its leading about 1,300 employees in this region. We'll give you a first-hand knowledge of what we do in the markets that we serve. Thank you very much.

Rakesh Sachdev

Thanks, Eric, I'd just like to summarize our growth strategy again. And our guidance for 2012 is the first half to be in the low-single digit area, and the second half approaching mid-single digits. We really look long-term. The drivers of our growth is -- will continue to be the innovative products, looking more expansion in the supplied markets, as well as using our e-Commerce engine to continue to fuel the growth, and of course, what you just heard from Eric on the emerging markets. If you take that 5% to 6% and you want to break it up, you could think about probably 2% of that is coming from price, 0.5% to 1% probably coming in the innovation area, and 2% to 3% in the volume growth. So with that, I'm standing between you and the break. I think we've got a great plan and believe that we will be able to execute this not only this year but going forward. So thank you. Let's get back here at 10:50, okay?


Gilles A. Cottier

Good morning. Let me tell you, I've been running our SAFC business for the past 3 years. I mean, I'm very excited about that business, a very technology range business. There's a lot going on, big orders. I like big orders. And what I'd like to tell you today is maybe specifically about our strategy but also what makes us different from our Research business but at the same time complementary. Those are the questions that we always probably ask. I'm going to ask also, as you saw on the agenda, Charlie Harwood, to tell you about how BioReliance fits with Sigma-Aldrich and SAFC. And then Phil Rose, who's been managing our Hitech business, how they intend to roll-out that specific business with us why it's becoming a most strategic part of our play in the fine chemicals.

Let me position this business inside of Sigma-Aldrich. So what you see there on the, slide, and like Rakesh mentioned, we bring into the market Life Science, Industrial and Electronic. and I will give you a little bit more detail in a minute about that. And once we are in the inner circle, it's basically our segment offering, what do we offer to our customer?

But then let me tell you, I just want to come back in terms of history, how did we as a company start in to play into it. Well, when you look at the history of Sigma-Aldrich, we got into a fine chemical space, because our customer took us there, right? We've been supplying research chemicals for many years, and customers using our products, they're developing products themself. And when you're starting to do this and make a product for commercial application and saying, "You've been making all these chemicals. I've been buying only drum. Why don't you make 5 kilos for me, 50 kilos and so forth." That's the way we got into that business, and we also quickly realized over time that to be successful in that market, you have a different dynamic. Quality is extremely important, right, and supply chain. And it's not about delivering the product the next day, it's delivering on time, and these characteristics drive different expectations in the way we organize this business.

As a matter of fact, when you look at what we sell -- what we do in research, what we do in fine chemicals, the real difference between these 2 is less about quantity than quality, right? Because, in essence, our research market is a market which is most -- for the most part unregulated, while the fine chemical market is a market which is regulated, which means that whether it's Electronic or Life Science, our customers have to validate our process, our product, our plant, they come to audit it before we buy products from them. And obviously, in the Life Science, it's regulated by third party, the FDA and their like around the world, and that makes a very significant difference between these 2 markets.

So we got there, and we got there because also, we started to dedicate resources. As a matter of fact, 20 years ago, we started to dedicate a sales and marketing organization to recognize our [indiscernible] in the fine chemicals space, right? And then probably, I would say 10, 15 years ago, we have -- we put more effort in terms of upgrading our plant, our quality systems, our supply chain. And then more recently, we made acquisitions, and we made key investments more then, and deepened our capabilities to that space. And then we grounded that business, SAFC, to make sure our customers, they understand that it's a complementary business from Sigma-Aldrich. It's one company, but it has to be a dedicated organization, because this is what our customer wants.

So let me talk again about the market. So the market for fine chemicals is big. It's bigger than the research, over $75 billion, right? And we play Life Science, which means it's typical suspect: biotech, pharma, diagnostics, electronics, semiconductor, LED, industry, all that. That's a number of different submarkets, food and beverage, cosmetics, specialty chemicals. And what's important is that we don't play in every subsegment of this market. We tend to pick and choose the areas where our customers and our customer products are growing as GDP will grow, okay? That's the case for oncology drugs. We supply all that for oncology drugs, because oncology drugs, or biologic drugs are going faster than the average pharma market, and that's the same case for LED, okay? So basically, what I'm telling you is that we don't want to be everything. We want to be very selective in the areas of the fine chemical market where we are going to play and where we are going to go.

Now let me just bring you in terms of what we call our sweet spot and also the connection also with Research. When you look at our [indiscernible] and when I look at the business of SAFC, we're looking at 3 characteristics, which are extremely important to be -- to select where we play.

The first one, what we make is essentially tough to make, tough to replicate, difficult to handle, difficult to transport, right? And why can we do that? Well, because, okay, we have this long history of making chemicals and tapping along with scientific knowledge, whether it's analytical chemistry, biology, mechanical science, organic chemistry, inorganic chemistry. We can tap on these resources that have been built up over many decades, right? And we know how to make chemicals and biologicals, right? That's our forte. Because these products are tough to make, tough to replicate, it creates a natural barrier as far as the competition. We have competition, but we have, typically, a limited number of competitors in each of the segments we select.

The second aspect, and Rakesh mentioned it a couple of times, is what we do is critical to the performance of the product, which ends up into the consumer. Whether we supply a specific medium formulation or are testing services now with BioReliance for a biology drugs, what we do is critical to make that biology drug work or be available to the market. Same thing when we supply a chemical precursor, which is critical to the drive the performance of the next chip that goes into the next computer, smartphone, iPad and the like. That's what we -- this is critical. And that means that we are going to complete about value, what value do we drive to the customer.

The last piece, last magnet piece is the small cost of what we supply into the overall picture, or the overall product that end up into the consumer. When we make inorganic compounds that end to be in the backlighting of a TV, what we supply is very small in proportion to the total. And what is even important is the cause, okay? We have to be price competitive. There is no way we can be successful if we are not price competitive. Typically, that means that what our customers can look for, they can look for value and less on price, and that's also a key characteristics of what we do and what we want to do.

So this unique -- when you look at these capabilities that follow our criteria, I just wanted to illustrate, okay, what are they, right? There's a number of them. These are the main ones that we've been either developing by organic investment over the years or with acquisition, okay? But what is also interesting, there are connection between these capabilities. And if you look at an antibody or a conjugate, which is the next generation of a drug that could begin changing in the treatment of cancer, we play very well with an {indiscernible] because you take an antibody and you conjugate it with an [indiscernible], right? Same thing now with the testing services of BioReliance. It goes out through the media, all the sales design or even the gene therapy, because our customers, they need both at the same time, right? So basically there's a complementarity solution, and basically, what I'm telling you is that what we sell to our customers is becoming less and less a product than a solution.

I'm not going to go through the example just to illustrate the final point. But just to take you to the bigger picture, when you -- when I look at what we sell today to our customer, okay, 80% of our sales is customized, whether it's an API, an active pharmaceutical ingredient, right? A media formulation that we have developed with our customers, right? It could be an assay, which is now part of the testing services with BioReliance and we have developed because of our customers has a specific issue in the virus contamination maybe in the plant that we need to detect. Obviously, a chemical precursor that we're developing in conjunction with our customer for the next generation of chip. But it could also be simply packaging, because it's going to add value to these customers, our customers' packaging, right? Our custom supply chain services or a profile of quantity grade which is not readily available, which we are going to make and develop for our customers, because quality is becoming more and more important for our customers.

So let me just take you at the high level in terms of what we call our formula for success. It's 3 pillars, right? It's customer intimacy, right? And because what we do is what our customers are asking for, and I'll come back to running the meaning more specifically. When you sold out operational excellence, which means, I said, on time. It is more than that. Supply chain is absolutely critical to be successful in this market, which means that you need to deliver the product on time, on quality, on quantity, and you need to do it all the time, okay? That is critical, and that's the reason why we need to have an organization which is going to be clearly focused on these aspects and interacting with our customers in a very discrete fashion. And in terms of this, because we're talking to our customers all the time to understand what they need, it gives us a view, a visibility of what is the next product, the next services that they are looking forward, right?

Let me just take it in a deeper level. When we're talking about customer intimacy, and you saw the chart before where you had this tail end of many customers, clearly, in SAFC, when you look at our plays, in every segment, in every of this big market Life Science, Electronic, Industrial, our, let's say, talk about these customers, they represent the vast majority of -- these customers are critical, and they are critical -- in choosing the customers we are working with, right, these customers are critical because of the sale that we get today but also, we're looking at the sale they can have, they can get -- we can get with our customers moving forward. And there is this alignment between the portfolio of product that our customers are developing and the capabilities that we have, which means that we need to have alignment, and we're choosing this very carefully, right? But in a business where 80% of what you do is customized and if you want to grow this business profitably, okay, you can't just do customization for everybody.

So that's the obviously sort of our strategy. I said we don't want to be everything, but we don't want to be everything to everybody, right? And that means that with these customers, we are choosing this customers also by realigning disproportionately our resources whether it in sales, marketing, R&D, supply chain, manufacturing to these customers. Of course, we want to develop the solution that matter to these customers moving forward.

So before I turn it to Charlie, just let me -- let me just give you a -- the overview of the way we are looking at integrating BioReliance, right? And we follow some guiding principles. First and foremost, we brought this company further, right? And I was just talking a minute ago about customer intimacy. That's a prime example of how do we apply this. The customer that matters, in that case, okay, is BioReliance, and our business in media. If we are not only good customers [ph], we are just [indiscernible] big customers, right? We share these customers, right? But our presence is not -- we have a relative presence with the customers based on project, based on molecule, based on relationship. So really, it's all about exploiting the relationship that we have one customer at a time, okay, to leverage our relative presence between the 2 organization. And today, our team, our respective sales teams are dedicated to these customers. They are working together to find these opportunities. And more long term, we are looking to develop new end-to-end solutions on media to downstream reagents to testing services that we are going to develop with these customers, because we're talking to them. We are very focused to these customers. We're talking to them every day, right?

The second piece of our approach is technology, right? And this is now when you can tap on technologies that are inside of a Sigma-Aldrich to BSM, right? So BSM can be used for -- with BioReliance very nicely, because we can now take what we already developed with the BSM technology, and BioReliance gives an additional channel to leverage our technology whether it's going to be a new animal model, a new testing services, a new assay, new cell lines. That's what we are doing. And then we started, obviously, the collaboration with scientific labels between the 2 companies.

Cost synergies. We didn't buy this company for cost synergies, but they offer cost synergy. They are being identified, and they are being implemented, but they are basically around in the right material and indirect services. Why? Because I think that we are actually [indiscernible]. BioReliance, like SAFC, we service security markets. We can't just -- which do things without understanding change control, the identification of. We're always focusing on the indirect, and there are opportunities. And there are -- the key aspect there is that we're going to look at the costing ideas that do not disrupt the business or this model of BioReliance. It is critical.

That leads me to the aspect on people. This business is about the people, and we were very impressed by the people that we met at BioReliance. As a matter of fact, the entire BioReliance management team is in place. We're working together, working. We have this great relationship and has been developed already in 3 our months. We're very pleased about this. And what we were also very impressed and was kind of very interesting is that we share together the same culture on achieving on our commitment.

So with that, I'm going to ask Charlie to give you more details, more color about BioReliance.

Charles C. Harwood

Thank you, Gilles. Let me start by saying that it's been only -- it's only been 2 months since BioReliance was adopted by the Aldrich family. I'm going to talk a little bit about the strategic fit to echo what Gilles just said. The cultural fit between BioReliance and the Sigma-Aldrich is really very, very good. BioReliance is kind of a down-to-earth group people, curious about science, curious about delivering exceptional service, serious about deepening the relationships we have with our top clients. And within Sigma-Aldrich, there are many kindred spirits, I would say. My management team is really, really pleased to be part of Sigma-Aldrich and excited about the opportunities for the future to be able to do things that we alone could not do but together with Sigma-Aldrich, we think we're pretty excited.

On the right side of this slide, you'll see that in 2005, the top 10 best-selling biopharmaceuticals were all traditional pharmaceuticals, small molecule-oriented. 2010, things started to even up a little bit, 50-50, and projections are that in 2014, 8 out of 10 largest best-selling biopharmaceutical drugs will be biologics. So it's an exciting area of growth, and of course, BioReliance participates in a big way in the biologic drug market.

Strategically, the combination of BioReliance and Sigma-Aldrich creates one of the broadest product and service offerings for the development and manufacturing of biologics. And that breadth of offering is not just about services married with products, but as a Gilles said, it's ultimately about the solution we can deliver to our clients. And there's a blurriness, I think, between services and products, and -- but it's the solutions that we can offer, more complete solutions for our clients, and those will develop over the course of time. And then that platform as well, what we're starting with right here in terms of service and products, I think provides a lot of opportunities for further expansion across a whole variety of laboratory capabilities that exist within BioReliance, Sigma-Aldrich together.

BioReliance was purchased for $350 million. It had a good year last year in 2011. We expect that type of performance to continue. And therefore, BioReliance has grown to be accretive to the Sigma-Aldrich growth rates and accretive in terms of earnings. We've heard Kirk a little earlier describe what that would be. As Gilles said, that this combination was not done for a cost-savings reason but to drive growth, and that will come primarily in 3 ways: from cross-selling; from geographic expansion, if not putting operations into other geographic areas; opening up other geographic markets, particularly Latin America and Asia; and finally, leveraging the technologies that exist within Sigma-Aldrich so that BioReliance can provide new and different services in the future.

In 2011, BioReliance generated revenues of $126 million. That was a double-digit growth over its previous year. Our flagship business is Biologics product testing. Some people refer to it as safety testing, but it's -- you'll see in a moment it covers a variety of different kinds of services. We also offer some specialty toxicology services. We're the global leader in gene tox services, and we have been the traditional leader in providing a transgenic studies for oncogenicity. We also have a third business. It's quite small, Animal Health Services. Think of it as a clinical lab for lab animals. These 3 businesses are operationally distinct from one another, but the common laboratory discipline sort of bond them together as does the fact that we -- all 3 of those businesses are doing work to GLP and GMP kinds of regulations. So this is a very common culture by lab discipline and by regulatory standards. We perform testing for about 3/4 of the top pharmaceutical companies in the world and about 90% of the top of biotech companies.

The graphic, you can see at the top there, sort of a schematic. I'm going to take you through this in detail of the sort of complete biomanufacturing system from the research cell line and owning a new gene all the way to the final drug product. It's broken up between upstream bioprocessing, sort of upstream of the bioreactor and downstream bioprocessing. And very simplistically, the bars here show where BioReliance and the Sigma-Aldrich/SAFC participate in this process. BioReliance participates broadly on the upstream side, doing a lot of raw material testing. We characterize new cell lines. We do cell banking. And downstream, we do a lot of lot- released testings. Every time a biologic drug is produced, it's tested for -- to meet safety criteria, and we also work on the downstream process itself in terms of doing bioclearance studies, things of that nature.

You can see that Sigma-Aldrich also participates very broadly across the entire biomanufacturing process. They are making raw materials. They are also -- there's a little bit of contract biomanufacturing and upstream process development and cell line development with the ZFN technology. So we both participate very broadly in the bioprocessing system. Our services are very complementary. There really is almost no overlap. The only significant overlap -- I wouldn't even say it was significant. The only overlap there really is that BioReliance has a little bit of viral manufacturing in Scotland, and Sigma-Aldrich SAFC, has, I would say, a small operation but bigger than what BioReliance has in Carlsbad for doing viral manufacturing.

The BioReliance testing services fit the vision of adding critical services that complement the products and the technologies that now exist within Sigma-Aldrich. BioReliance provides Sigma-Aldrich with much greater access and the ability to play in the fast-growing biological therapeutic market. Thirdly, as we talked about just a little bit ago, the broad offering of products and services is really going to allow us to provide some very comprehensive solutions to clients that are going to have a hard time -- have a hard time today finding through any other provider.

And finally, in a world where biomanufacturing support services such as we offer-- such as Sigma-Aldrich offers today without BioReliance. It's a very fragmented industry, and we believe more of a single-source provider, one that's very reliable, one that has very high quality will be very, very valued in the market.

The aim is to not only to continue to run BioReliance well as it has been. It's a great business. It's going to grow and get bigger, would do all on its own but. But in combination with Sigma-Aldrich, the idea is to generate revenue synergies in the order of $40 million to $50 million on an annual basis in about 5 years' time. So how are we going to do that?

First, as Gilles already mentioned, we really do want to leverage the relative strengths in BioReliance and in SAFC with our top customers. We've got some great strong relationships, and we think those relationships can benefit SAFC and vice versa. Secondly, Sigma-Aldrich has a presence in Asia and in Latin America that BioReliance simply does not have. We gain much greater access to those markets by doing that together.

Thirdly, we think we can offer, in the course of time, fairly near-complete upstream bioprocessing capability largely based upon the zinc finger technology. But there are other pieces there that exist within that we've got to put in place. I'll give you a good example. Within Sigma-Aldrich, there's good analytical chemistry capability for large molecules, an aspect kind of capability that probably is the #1 thing that the BioReliance sales force would like to sell. And if they had it tomorrow, they could really go to town on that. BioReliance has traditionally been a very expert in biological laboratory techniques. We're not so good at the analytical chemistry stuff, but that's something that Sigma-Aldrich brings to the table.

Number 4 here is just that overlap that I mentioned before. The only real overlap we have between the 2 companies is in the viral manufacturing. Our sales force can sell that capability that exists in Carlsbad. Carlsbad has some upstream processing capability that we don't have in Scotland. So there's a good marry here, and this will be sourced as some of the revenue synergies. And then finally, as Gilles mentioned, new cell lines and new animal models can be created with the ZFN technology. And when that is done, we can commercialize that using the BioReliance platform that exists within our specialty toxicology business. We can take those animal models and cell lines, and we can turn them into new assays. And we've got the service platform in place, where we could sell it not only to our traditional clients, which are GLP oriented, but actually, what excites us is being able to tap into the research market with assays that we can provide based upon Sigma-Aldrich technology.

Okay. So with that, I will turn it over to Phil Rose to talk to you about Hitech.

Philip Rose

Thank you, Charlie. Hi. Good morning, everyone. My name is Philip Rose. I've been with the company for 2 years and have been running Hitech at the same time. It's my pleasure to stand in front of you today and give you a little bit of background on Hitech, a little bit about what we're doing. I don't know how familiar this audience is with the Hitech business, but hopefully, after the next 10 minutes, you'll have a better view of where we are and where we're going.

So the first thing, if you guys can think about Hitech, one thing I want you to think about is Hitech has the electronics material division within Sigma-Aldrich. And it's really the part of the business that there's the commercial part of the electronics material position. My colleagues in material science is, Frank was alluding to, a lot of activities in electronic materials, materials for electronic division is primarily for the research market. Our focus here is developed entirely on the commercial end of those things.

Let me just get our first slide up there. To go in a little bit deeper there, 2 key markets that we serve today primarily in SAFC Hitech. The first is the LED market. And a part of the segment that we're in, we provide precursor materials to those manufacturers of the LED chip. That epitaxial growth of all the functional layers actually emit light. They're diced up and packaged into different lighting devices. So our customers in North America are some things like Korea LED. In Korea it might be Samsung LED or Seoul Opto. In Taiwan, it's the FDI, Lexstar, Huga [ph] and may be Sunon [ph] in China. So that's the part of the market that we serve for the LED market. We have a full suite of products that we sell into that market.

The other area that we serve primarily would be the semiconductor market, and those are the people that actually make computer chips. So it's the Intels, the CSNTs [ph] and the IBMs of the world. And in those 2 segments, primarily what we sell to them are metal organic precursors. These are molecules that are specialized for in-use applications. They have a metal, and they have an organic ligand. An organic ligand is used to transport that molecule onto the surface of the chip, which then creates a metal or a mixed metal or a metal oxide or a metal nitride structure on those chips -

The third area that we serve are really the emerging technology areas. But we have a fairly large capability in the first 2. We have less capability of an emerging capability in emerging technology areas like superconducting cable, quantum dots, organic light-emitting diodes, alternative energy, scintillation detectors. So we have a fairly broad presence in a lot of electronic markets, but our focus again is semiconductor and LED, a lot of business development and technical support and application engineering going into the emerging technology area.

So how do we drive our competitive advantage? I've highlighted on this slide with these 5 bullet items. So first is really a proxy for customer intimacy. We don't live without having very good relationships with our customers. We develop products together with our customers either in joint development or in design and processes, and we have a team of technical experts that work closely with them to develop these products. If we don't have that, then we really can't survive. We have products that are on the shelf that we don't -- customers don't typically order products from us in that fashion. We come, and we work, and we design them fit for their use.

Because our customers are fairly technically savvy, as you can imagine, we have to be able to mimic their processes. We need to understand the structural property relationships. We need to understand our products are used in their processes. We don't invest in their tool set necessarily, but we do invest in application development that mimics their process. So when you design a product, you know if it's fit for their use. We also need to make sure that our products are the same every time. So there's consistency, and there's also quality, and a lot of that is around application and test technology. We develop the state-of-the-art test technology to be able to guarantee to our customers that what we make today in the is the same product so their process runs the same, and it's in the highest quality necessary.

So Gilles was talking about packaging. I think in the Hitech business, packaging is actually a fairly important aspect, because these chemicals are often difficult to handle. Sometimes they're pyrophoric, which means they catch fire when they're exposed to air, so they have to be packaged in very highly engineered containers. And also, the way that they're delivered to the customer and our customers tools are also dependent on the engineering of these packages. So we invest, and we have capabilities in the fundamental design of these packaging. We work with our vendors who make them for us. Sometimes they're specific to a customer. We'll even customize a packaging for a customer. So all of these competencies coupled with our ability to leverage Sigma-Aldrich's quality purchasing, warehousing capabilities really drives our competitive advantage in the space where we play today.

So that's a little bit about Hitech. I wanted to take the opportunity to highlight one of our markets that we serve, and that's the LED market. It's-- gets a lot of attention. I'll take the next 3 slides and just give you a brief overview of that market, because it is important for our growth, and we are investing in securing a strong position in that market with our technology today.

So really LEDs, light emitting diodes, are used in 2 primary markets today. One is backlighting for displays, and typically it's a liquid crystal display on your cellphone, your iPad, your iPhone, your laptop computer. Your TV at home oftentimes is a liquid crystal display. It has LED backlighting. So the light comes through liquid crystal. The liquid crystal is just the shutter, opens and closes. The lighting actually comes from the LED. The other is in general lighting. That's the other emerging area of high growth for LEDs going forward.

So the primary drivers for the growth of LED are really how many laptops are sold in the world today, because virtually all the laptops and cellphones that are out there today all use LED. There's not a lot of alternative lighting technology that you put in those. The second is really penetration of LED lighting into TVs. So while the overall sales of TVs are important, how many of those TVs actually use LEDs is an important factor. In 2011, that penetration rate was about 40%. So about 40% of all TVs shipped had LED lighting. The other 60% we used fluorescent tubes, very small, called compact fluorescent tubes. And this year, it's expected to be greater than 60%. So you can see as the TVs grow and the penetration rate grows and the LED grows, we'll grow as a function of that. Another compounding factor is how many LEDs are used in a given TV, how big are the TVs, how big are the area. But overall, like I said, it's how we're going to grow story for use in TV.

The other is general lighting. I'll spend a bit more on the next 2 slides and talk about the general lighting market. But today, it's anticipated that about 2% of the overall general lighting market uses LED. That's expected to grow by 2014 to 10% and by 2018 to 25%. Now if you extrapolate that around the world, how the lights are used, that's a fairly high growth number for the use of LEDs and in general lighting.

So these are some of the reasons why we're investing in this market. We believe it's going to grow. We have key enabling technology, which is fundamental to the performance. If our materials aren't the purest, then you don't get the brightest light out at the end of day. So it's very important that we're able to meet our customers' needs in this market.

This slide is -- it depicts the LED market in billions of LED die. So the vertical axes are the billions of LED die. And a die is simply when you take a wafer -- this is manufacturing LEDs. You chop them into little bits. Each of those bits is a die. That die gets integrated into some sort of lighting device. So the light bulb that you can buy today at Home Depot might actually 4 or 5 or 6 die, or it could have a 1 depending on how big it is. So the area's also relevant there. So that's I'm representing here in terms of die. So you can see then in 2012, backlighting, which is what I referenced before, LCD backlighting, display backlighting, was by far the largest numbers of LED shipped, and it will continue to be that way for a few years going forward.

You can see that lighting begins to become more sensitive in the out years in this forecast, and then there's a large chunk at the top of off-spec. When you manufacture an LED, it's -- they're manufactured to a specific color and a specific light intensity, and those are designed for specific end uses. When you don't hit that spec, it becomes off-spec. And it gets shipped for things like games and handheld, little devices and things like that, things that don't have a very specific and tight specification that's required. But there's still a fair amount of the market that's in that off-spec.

Now easily, you see this graph, you'll see a revenue graph, because obviously, revenue is important to our customer. And that's flatter, because there's a lot of price reduction going on in the marketplace today. When you talk about general lighting, you go to Home Depot and you want to buy an LED light bulb, put it in your home, they're still about $15 to $20. The reason is compact fluorescent, which is another alternative, that's maybe in the $7 to $10 range versus an incandescent lightbulb, which is pennies. So the industry has to continue and drive that price down in order to begin to really penetrate the general lighting market, and that's why you see a lot of these currency relatively flat on a revenue basis.

Dies and -- billions in dies is important for us, because the material equates to how many of them are made. But more importantly, the area, total area of the die is the most important metric for us, because the amount of materials that get deposited depends on how much area is actually consumed. So just to give you a reference point, the forecast growth in 2012 on this graph on '11, '12 in terms of billions of dies is 18%, and the actual area growth is 35%. And that's because the die for lighting is much bigger than a die for the application area. So when that begins to penetrate in the market, we'll see it actually grow. So it's important to keep those metrics a little bit distinct. They're relevant for different reasons. Obviously, price is important for the overall industry, because it'll put price pressure on everyone. But again, to Gilles' point, we're still a very small part of the overall cost of an LED lightbulb at the end of the day.

So then a little bit about the general lighting market. I mean, one of the drivers for the growth of general lighting for LEDs is really the phaseout of incandescent lightbulbs. And this is because there's something not efficient. They're wasting energy. If you compare an LED versus an incandescent lightbulb, it's similar light output. The power requirements are 1/8 out of an incandescent lightbulb. So if you're a company like China and you see your population growth, you see industrialization, and you need to now light this industry, it's a lot cheaper to go to LED than to build 3 or 4 or 5 new power facilities around the world or around the country, and it's probably more than 3 or 4 or 5. But that's really what's driving the fundamental phaseout of incandescent lightbulbs.

In the U.S., there's not a ban on lightbulbs as much as there is a requirement for a certain efficiency, and that efficiency cannot be met by incandescent. So indirectly, there's going to be a ban on incandescent lightbulbs in the U.S. Now the government and all the bills, and the way these things get pushed around, it's actually been delayed from the beginning of this year through October. So currently, it's scheduled for October. We'll see if that holds. In other parts of the world, they're a little bit more -- a little more stringent in terms of incandescent.

The compact fluorescent is also fairly efficient. It's not as efficient as an LED. It doesn't last as long as an LED. It also contains mercury, and it's a real environmental issue. So I think that the clear winner in my view and a lot of the views of the analysts out there is that LED is going to win in the game in the intermediate if not longer term for lighting for the general lighting market. There are other technologies that do exist which could come along. Organic light-emitting diode, which is mentioned in the press, not quite as efficient, not quite as long lived, still has a little bit more to go in the technology cost curve. So we can watch out for that one. But I thing for us, for Sigma-Aldrich in our investment in precursors for LED, I think the lighting as well as the backlighting market are going to be good bets for sustainable growth for us for the next several years.

So then, a little bit about our footprint. We talked -- I talked a bit about who we are, electronic materials, our customers, our products, a little bit about the market. We just recently opened a facility in Taiwan to serve both the semiconductor and LED market. To be quite honest, in the last few years, we were out of capacity for a lot of our products, and we made this investment for a number of reasons. One is we needed more capacity to sell more product, but we also wanted to be able to better serve our customers in the growing Asia Pacific region.

So I chose Taiwan for a number of reasons. In terms of our location, we had a good team there. Taiwan is a very good location for high technology in both semiconductor and LED, and they also export technology to mainland China. And they offered us a lot of support through the government as well. So it's a real logical location for us.

So we opened our facility on March 15. This is a few weeks ago, and we had over 150 customers and local government officials there to support our grand opening. We will manufacture products for both semiconductor and LED in this facility. We also have a local technical service for the region to better support our customers. So I think it really reinforces our commitment to the region and allow us to better supply not only products but service to our customers throughout the region as well.

So I think Hitech is -- it's a small part of Sigma-Aldrich. It's a rapidly growing part of Sigma-Aldrich. I think we're well positioned with our portfolio. I have a very strong team throughout the world. We have a very dynamic and robust market. We have strong product pipeline in R&D and good customer intimacy, and I think we're well positioned to continue and deliver profitable growth to Sigma-Aldrich and their shareholders.

Gilles will come back and close for SAFC, and I think Rakesh will wrap it up. Thank you very much.

Gilles A. Cottier

Thank you, Phil. Let me quickly wrap it up for you. We tell you, as you've been probably following our company for a few years. You saw that the SAFC business could be lumpy quarter-to-quarter and I can tell you 2010 won't be different from the other year. As Eric mentioned to you, I can confirm we'll be basically flat this quarter, but we have a--we stand today where we stand today. Based on our bookings, based on our visibility and our customers, I'm quite confident that we're going to be able to deliver another year. After consecutive year of high single-digit growth, we're very pleased about that. And we intend clearly to do that in the flowing [ph] and I think what we have the capabilities, the customer intimacy, to give us a visibility of the pipeline, of the portfolio of our customers that give us, I would say, that confidence. So with that, I think that Rakesh is going to conclude our presentation this morning. Thank you.

Rakesh Sachdev

Thanks, Gilles. Well, it's always a challenge trying to explain the entire businesses in about 3 hours. Hopefully, you've had a much better understanding this morning just listening to the various folks who came up here to give you an idea of not just what our business has been but how we are taking it forward, and how we are leveraging. I think we've got a really existing story in the company. As you can see, we have, obviously, a strong financial position in the company. We've got a proven global franchise that we feel very good about. The diversity plays a big role. We talked about diversification a number of times. We are a recognized brand, and we are strengthening that brand. We are in a stable market. I think one of the reasons why people like us is the diversity, we've got tremendous stability in market and products, and I think we have really honed our strategies for future growth in this changing landscape.

And we do understand the landscape per region, and we'll continue to. And we will not focus on any one sort of big lever. We are focused on innovation. We are focused on the channel optimization. We are clearly focused on the emerging market and performing well. We are doing well on the commercial markets. We were a research company. We are now very much of a research and a commercial company. So Gilles and his team talked about the things we are doing in a number of the areas and fine chemical space. And frankly, I think we have become a little more aggressive on the M&A side, at least driving a lot more growth. We've done -- so granted we are doing bolt-ons, but those are easier for us to integrate some of those and continue to do those. And you saw a part of our management team today. I think they have very qualified and energized team. And we all actually anxious as well [ph] and over the results on the next several years.

Before we go into the Q&A session, I think I would like to point out some of the other leaders that didn't get a chance to speak with you today. I'd just ask them to stand up when I call their names. So Gerrit Van Den Dool, if he's here. Gerrit runs our North American business. So for those over lunch who want to understand what is happening in North America, Gerrit will talk to you folks. Mike Harris is here from Europe. Mike runs our European business. He's based in Switzerland, and he'll talk about what's happening in Europe.

We've got Karen Miller, and most of you know Karen. She is head of our strategy and M&A, starting with all the good stuff that's happening recently. She was also heading up our eBusiness until recently, of course, was under the leadership of [indiscernible] who you heard from. Doug Ray, who's our Head of Human Talent and Human Resources. And then at the back, Mike Kanan, who's our Corporate Controller. Joe Porwoll, who runs our global operations strategy and supply chain. He's very quiet there, but his team delivers everyday on improving the efficiency of our supply chain.

We've got Silji Abraham who's -- heads up our IT, functions very, very close to us as a company. Lots of things depend on IT. It's a very critical function all the way through. I think you've got a glimpse of that. Steve Walton, who heads up our environment, health and safety for the company, again, very key in compliance effort. As I said, Jan Bertsch is not here today. She is our CFO. Also not here today is our General Counsel, George Miller, who couldn't be with us here today.

So again, I want to thank all of you for the time and the travel that you had to undertake to be here. I hope this was a profitable morning. It's not over. We're going to have a Q&A session. I'm going to ask the folks who made the presentation to come here. And we'll open it up, and hopefully, we'll have a lively discussion. Feel free to shoot, ask the tough questions, and we're here to answer them. I guess I will be the MC.

Question-and-Answer Session


[Operator Instructions]

Rakesh Sachdev

And Mike, do you want to come down here too, since Jan is out here. Okay. Who wants to -- Mike first. There's not enough chairs, but if you want, you might want to just scoot here because he might fall on you. And Karen, you also -- sorry, we should have thought about adding a few more chairs. Okay. So let's turn to the audience for questions. Yes?

Jonathan P. Groberg - Macquarie Research

It's Jon Grobert from Macquarie. So just big picture, I guess, you mentioned 6% to 7% organic growth rate. You though maybe it could be conservative. I know you brought it down a little bit from your previous target of 7% to 8%. If you look back over the last 4 years, organically, from around 5% to 5.5%. So I guess what are you seeing out there? What are people saying that makes you think that's -- either whether it's internal or whether it's external from a macro standpoint that makes you think that growth rate is actually going to accelerate?

Rakesh Sachdev

I would say there's 3 things that are likely to be different forward. One, I think in the last couple of years, I've been a little more [indiscernible]. I think what's going to be in higher gear going forward is really emerging market growth. We haven't made the investments like we had over the last 12 months, and we'll continue to do that. That's going to be a bigger driver of [indiscernible]. I would say our innovation engine has got a lot more focused. They're clearly seeing, and we've seen the evidence of even in our emerging biology business that you saw 30% of that growth is becoming a bigger piece. That's going to become more prominent in our overall growth. And I think this whole effort around customer intimacy, where we'll be doing it on the marketing and e-Commerce, is going to kick in and give us more benefit. So even though we've had the 5%, 5.5%, 6% built in the last couple of years, I think a 6% to 7% is very achievable. As I said, I'm hoping that we'll come be surprisingly positive. And I don't know if anybody, either Frank or Gilles, want to add any more color.

Tracy Marshbanks - First Analysis Securities Corporation, Research Division

Tracy Marshbanks. Following up on your number 2 driver there, innovation? What do you -- it's always -- it's hard to capture innovation, because it has long lead times, and if you get it right, it's hard to tell if you get it wrong. It's hard to fix it, because it's -- the lag is so long. What, internally, do you look at? And how do you benchmark yourself to know you're on the right track to distinguish yourself on innovation?

Rakesh Sachdev

Let me ask Frank to answer that.

Franklin D. Wicks

Yes. I think one thing is just having the right metrics in place to understand both the -- how long of a development time. We track these things. We've got amp charts that tell us exactly when we're going to get them launched. We try to have parallel tracks between marketing and R&D, so that when we are ready, we're ready to get out in the marketplace with that. We try, especially on those things where we have a higher R&D investment, spend upfront time understanding the customer where we actually get out and have to check with them and see what the demand level is and what they're really looking for so that we do feel something they want. Dave, I don't know if you want to add anything to that?

Rakesh Sachdev

Let me just add one thing before I turn to Dave, because he can build on what I'm going to say here. As part of our new product introduction process -- because again, innovation has bought product related and process and come back and talk about processes -- push process [indiscernible]. But on the product side, in the new product introduction, we have a very formal process I'm sure I'd like Dave to talk about for every product introduction. We have gate reviews. We understand early on if it's going to work, not work and do we shoot it down. And we have a whole store of these, because again, as I said earlier, we are not betting on major product introduction, like just 1 or 2, that will either make this company or break it. We have 4 of them. Dave and his team lead that. It's a joint effort with sales and marketing all the way from concept to cash.

I think these guys covered it very well. But we have, I call it customer-centric stage deep, just because it is very client-focused. We have a marketing group that does voice [ph] of the customer, we then develop design implement requirements. You call them specs. We go through a stage gate, we kill things early, hopefully fail early, fail fast. And then we go through the whole marketing and adoption curve and we look at things to make that are as broad as possible and affect as many people as possible so that we can get a large market. The other thing with like is things that grow out, and the things that were not in. So if you came into a meeting maybe 5 years ago, we weren't talking about the cell biology market and microscopy, you saw green cells and animals. We're opening up new dollars and new markets that we've never touched before. We talked about preclinical and toxicology. I don't think we've talked about that in the last couple of years. So innovation allows us to hook ourselves into new markets that drive not only our innovation products, but the other products that we move along through. So innovation is a great lever.

Amit Bhalla - Citigroup Inc, Research Division

Amit Bhalla from Citi. The topic of launching a value brand came up a couple of times early in the presentation. So I was hoping you could expand on and quantify how much of the market do you think you're missing out today that the value brand will be addressing? And secondly, what the impact of margins versus the volume you hope to gain over time?

Rakesh Sachdev

I'll answer that question and then turn it over to Eric Green because much of the value brand truly today is for emerging markets. When we found that we were look -- we were not able to compete in several segments of the market and the emerging market in China, India, Brazil and because there were certain types of products and certain types of customers who wanted a certain value brand from a slightly lower price and were willing to live with slightly low purity levels, so we're seeing some other changes and so we decided that we didn't want to pass up on that market and we bought Vetec in Brazil. That gave us a beautiful entry. We are co-existing with the Vetec brand. I think that opened up new markets for us. Although, I said, Vetec was very strong in the industrial side. We experience a weakened industrial side in Brazil. We were strong in academia, they wanted [indiscernible] academia. Same thing in China, we made a whole list of products that we didn't even try to compete in China and we are now creating a value brand for those products that we will actually make, package, do QC in Wuxi and that's opening up a market in the Imperial China. We were very strong in the eastern of China around Shanghai, Beijing. Now we have moved into the inside of China. How big these markets are? I mean, typically I think you would, Eric -- I mean, they are fairly significant. I'll let you talk about, maybe say a little more about the value brand but also size it up for us.

Eric M. Green

Absolutely. So Vetec was a great example in how a value brand creates a lot of penetration for Sigma-Aldrich and we look at Asia right now as I mentioned before, a lot of the competitors, it's highly fragmented. There are local competitors and it's a very focused area of the portfolio. So it tends to be high-volume items but the problem that customers see today is the variability of quality and service. They're looking to us to say, how can you bring a product to the table that is consistently the same quality that we are looking for and also, the service and delivery mechanism that we're accustomed to for Sigma-Aldrich. By having the localization, the capabilities of doing this locally, not importing across the globe, we are able to position these products and be competitive against the local competitors. So again, the markets are actually quite large. What we are finding is -- especially in Asia and you'll find pockets in China, Southeast Asia, India, also in Latin America, is that markets in the-- more of the essential consumable area, it's about 40% to 50% of the market tends to gravitate towards the value segment. Now, to be assured is that the focus though, by having local assets, we're able to maintain margin expectations as we're accustomed to here at Sigma-Aldrich and so we do feel that we have a really good position. The last point is having that endorsement from Sigma-Aldrich, the quality standards, what we stand for, the quality assurance is consistent and that's where we're going to get the advantage with the value brand in Asia.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Isaac Ro from Goldman Sachs. My question really has to do with margins. Trailing 5 years, you guys have done over 400 bps of operating margin improvement. I think going forward, it was stated that you guys were looking for a little bit better than 100. So maybe that could be viewed as a combination of conservative, as well as somewhat dependent on some of the broader forces in the currency and so forth. But from a fundamentals perspective, I was curious if you could maybe approach that question from 2 angles. One of the research side, what are you seeing on the pricing? I think Frank had said that you're looking for about 2 points of pricing over the next few years. It seems to me that -- a lot of potentials in the labware markets. Pricing has been a little bit tougher to come by. And then secondly, on the SAFC side, for Gille, I'm just curious how does that -- the LED market opportunity, how important is that to your margin structure over time and how is that business scale?

Rakesh Sachdev

So, that's fine, I'll let Frank and Gilles answer the specific questions you've asked on resurgence but as you and I discussed over the break, I mean we've done a good job on margin expansion over the past several years. As I've pointed out, we've expanded margins [indiscernible] performance. Largely as I said earlier this morning, it came from [indiscernible] improving efficiency of our [indiscernible] supply chain. But I think what's also not lost on ours -- while margins are important, at the end of the day, we are trying to drive return on equity and the return on invested capital of the company and there will be times where we will take on a product or business that carries slightly lower than our average margin but it may have a tremendous return on assets and still the right thing to do to creating shareholder value, and they're going to do that. So putting a stake in the ground, just on the operating margin I should say the -- I think we should look at several things that drive shareholder value. But having said that, we are not going to rest on the fact that we have started on is to improve efficiency within the company, to get more and more efficiency in margin, but I think we have to look at a number of things that might influence our margin log going forward, that's how it will be. But specifically on research, again, we are not that much of a labware market, it's a very small business. So when Frank talks about pricing, that we are able to get a couple of percentage of points probably in the specialty chemicals and some other things.

Franklin D. Wicks

I think historically, we've always been able to hit that at 2% to 3% price over the years. I would say the big thing that's changed is that to be able to continue to do that, one, we've got to be more strategic. When I say that, we implemented over last actually, 12 months, a new software program that's allowing us to gather and segment our data much more effectively and it actually is used by the sales folks so that they can actually see what kind of deal that they can do and what they can't do without workflow approvals. And so this I think is one that just really helps us to see where the opportunities are. And just to give you an example, about half of some of these commodity items like solvents, we sell 1 bottle at a time, a late pay, less price and you can still get some price increase on those types of things and then the others that are more competitive, again we're going to be able to see more visibly by using the power of the software that we have so that we can make better deals. So I'm pretty confident that, that 2% is going to be easily achievable.

Gilles A. Cottier

On the SAFC side, let me tell you what's really driving driving our margin is volume. We are a business where if we got the volume I could have price pressure equal simply to a customer to buy 10x more even though it was better priced. However, the products fully loaded, there is a significant portion of our cost, which is fixed because we own the plant. You can -- whether apply pressure and see that and maintaining margin. So that's a big feature obvious and any and LED -- I mean often, we fail to comment specifically on LED but just to mention this, okay? Hitech is 15% of the sales of SAFC. So if you compare it to even smaller [ph] and then then India [ph] also, a smaller portion, so again directionally, volume is going to be the big driver but we want to comment on anything significally?

Kirk A. Richter

Yes, sure. I think like in any market, it's a portfolio of products, it's a portfolio of countries, it's a portfolio of customers. So you might have one customer high, one customer low. Overall, it is a volume game, it's a value game. But at the same time, we have to be conscious of our cost and we're always looking to reduce our cost base as well. So we've been in the game for -- we've been one of the primary suppliers in the market for a long time and we will continue to be a special part in the market and it's my job to return in shareholder values, all the other businesses. So that's what we intend to do.

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

Maybe just -- this is Tycho Peterson from JPMorgan, a question as to how you're thinking about to build out the service the business over time going forward? I mean, with BioReliance obviously, you have a nice business here on top of Biologics. I mean certainly, there's a laundry list of services [indiscernible] would like you to provide as we see in that industry, it's kind of boom or bust, and there's a lot of it deals with capacity and things that a lot of the larger players [ph] are struggling with. So how do you think about building out additional services to pharma and where do you kind of draw the line?

Rakesh Sachdev

Yes. So I think the way we look at the service business is 1, where we truly have to base it on a differentiated offering in that business. So we don't want to be in the services business just in the plain vanilla game, we understand that. So right now, we bought BioReliance. We have plans to grow that business with our technology and to customer intimacy. We're going to do that. We are really focused on that. We are using zinc-finger technology on some of the toxicology stuff. We may do a little more there because I think we have some good opportunities to use targeted cell lines, and targeted animal models, to create a real differentiated service offering vis-à-vis other suppliers but that's where we are today. We are going to walk before we run and so there is nothing in our sort of plans right now we say even before we have done that researching [indiscernible].

David A. Smoller

I think maybe just to reiterate what you said, Rakesh, we're either going to leverage our technology or leverage our relationships, that's how we would plan to move forward.

Unknown Analyst

And then just a quick follow-up, can you talk on the academic markets out of the plants office in last quarter. Just talk a little bit where you saw that software specifically and obviously, we're heading back into [indiscernible]in the new year so how do you think about visibility there?

Rakesh Sachdev

So we get the softness in the fourth quarter and for those who are listening into our earnings call because I was uncertainly [indiscernible] and then we started seeing some improvement back in [indiscernible] and frankly as I said, coming into Q1, we've seen some strength. We are hopeful that as we go through this quarter and we'll be announcing our results here in a few weeks. So we are cautiously optimistic. That's all I would say at this time, [indiscernible] pretty consistent with what I said.

Daniel Arias - UBS Investment Bank, Research Division

Dan Arias from UBS. Rakesh, can you just talk a bit about expense levels going forward in the context of a more innovative or proprietary portfolio just given that, that presumably carries higher R&D but also more specialized, more expensive sales force?

Rakesh Sachdev

I think what we've been trying to do, well, our R&D dollars may go up somewhat but I can tell you that by refocusing what we are going to work on, what we are not going to work on, I would say that we have -- our budgets are still large enough for us to pursue our innovation. Now, we may do more licensing as a company, we have chosen to because we know that we can't innovate everything under our roof up from scratch and we have a number of I think, today we have over 600 licenses. We've always looked at that. That's an additional expense and we are prepared to doing that. But in terms of just R&D expense and some of the scientists we have and focused on, I still feel pretty good that within the R&D budget that we have put in our 5 year plan, it goes on and as far as the sales force, you're right, I mean, we are or some of the products, some of the things that you heard Dave Smoller talk about today. So we need more record sales we are -- we have built that. But again, it's just a very focused team. We don't need the salespeople [indiscernible]. We use things like seminars. This is not sales on one-to-one always. We are trying to be very smart about how we sell, how we go to shows, how we talk about our technology, how we deliver that even that education in the internet. So from different ways. So I don't need to think that because what we talked about today would change our operating expense.

Unknown Analyst

Rafael Shehado [ph] Bank of America Merrill Lynch. I just had a few questions on the company's long-term financial targets. The first one on the 6 to 7% organic growth. What's the assumptions behind the price and volume there and as you expand your presence in the emerging markets, do you think -- what kind of pricing power do you think you can achieve in those markets? And secondly, just based on today's FX rates, what is the projected EPS growth rate that you see over the next 5 years?

Rakesh Sachdev

Well, I think we have discussed the pricing power, we're still assuming the business in our 6% to 7% of annual growth rate [indiscernible] we'll get to 1% to 2% pricing [indiscernible] globally. And frankly, we don't count on a lot of pricing in SAFC. As Gilles said, we plan on profit improvement in SAFC as the business grows 8% to 10% but pricing would be 1% to 2% for research so it would be even less than 2%[indiscernible] company because[indiscernible]. I would say in the emerging markets, our pricing power is very similar. In some cases, it might be a little higher in some countries [ph]. But on average, I would say our pricing power is very similar. Now one of the questions that you haven't asked sometimes as we get this question is, how are your margins in the emerging markets where you are growing? So that's where you are growing, are your margins better? Are they worse than the average margin? I can say today, those margins are if not the same, they are slightly better. So I think we get a double whammy today. When we grow emerging market business, we have top line growth and we also have [indiscernible]. But we do understand that over time, there's going to be pressure on pricing in the emerging market, which is why we have been doing the localization strategy which is why we are localizing in China and India and in other places. So we're going to be taking cost down so we're getting ready in case we have to address the pricing issue our margins are not going to suffer.

Unknown Analyst

And what's this on -- how you see EPS growing just assuming the...

Rakesh Sachdev

Well, our EPS, if you look at the last 5 years has grown, if I'm not mistaken, Mike, about 11% to 13% [indiscernible] and I think we are internally, at least our plans are to keep a run rate on the EPS growth at that double-digit or near double digits. We have a wildcard with FX as you pointed out. But under normal conditions, I wouldn't see that run rate change. Yes?

Unknown Analyst

Misty Soriani [ph] from Baird. To just go back to the emerging market point real quick, I think Eric put up a slide that showed kind of the contribution in China, India, Brazil from kind of now to 2016. As you think about the broader pie of year end market exposure and presumably that apple a piece grows, given what you know about the other end markets kind of all in, how does that evolve kind of over that time period given your long-term outlook or from Europe or from kind of North America, I guess?

Rakesh Sachdev

I think in that we're still assuming that we will drive growth in both U.S. and Europe. I think we said in the slide, it won't be at the rate that we are driving at but in fact, in our long-term outlook, we outlook we thought the APLA was found some more than we have been experiencing and frankly, what we will experience even this year as well. Now, I think, if you were to speak maybe, I don't know [indiscernible], they can talk about something they are doing to driving growth in Europe and the U.S. Eric, you want to just say a few things?

Eric M. Green

Sure. We've got a great history in this company of keeping our service high. Because we keep our service high, we keep very, very high customer loyalty. So our base business is very, very stable from that perspective and is growing as we add volume and as we add price. For the same stage, we are adding sales through the ABC strategy. We're really trying to drive through new technology into the marketplace. Really going through some of that specialty spelling that we talked about earlier and so those are the kind of things that we're trying to do in order to grow the business in Europe.

Rakesh Sachdev

Other questions?

Dmitry Silversteyn - Longbow Research LLC

Dmitry Silversteyn along with Longbow Research. A question on the research department. You sort of went along the path of fragmenting the market with your divisions. You went from research to research and biotech and specialty essential to biotech and then you sort of did a 180 and consolidated it all back into 1 research. So what was wrong with the previous path and what's changed now that it's all under 1 roof other than general and administrative cost going out?

Kirk A. Richter

Yes. The way I'd respond to that is that our customers and didn't see it the way we did. When they bought a bottle of research product, they didn't see it coming from research specialties or essentials. So I think from that aspect, we said okay, if our customers aren't thinking that way, what is a better way for us to do it? And I think as we looked at how we are organized ourselves, and especially on the innovation side, getting someone like Dave that can look across all our Research business and say okay, now how do we innovate supporting that in a broader way and then developing those different innovative platforms in each of these other segments. So when we think ABCM, we are really looking at those segments of those areas that we're growing faster than, let's say, our traditional broader areas. When we think about analytical, we are looking at the food and beverage segment of analytical or the environmental or drug standards and we've said okay, those are areas where we innovate, add new products, we are going to grow faster. So I think from that aspect, and I think also just as we the support the regions at the same time we did this, we also developed a regional focus. So the idea is that the research business unit is strategic. We're the ones that are doing the innovation and driving the marketing programs but the sale and the execution of this happens back into the region and it's just getting that to work properly is what really helps to drive the execution into these different regions and helps us grow.

Dmitry Silversteyn - Longbow Research LLC

On a broader sales question. Let's forget the history of the 7% to 8% growth that was never hit. You've fell into 6% to 7%. I'm going to ask it from a little different question than the gentleman asked. Not what's going to change to get you from 5% to 6% to 7% but what happens to your way of looking at the market since you probably have to take it down from 7% to 8%, down to 6% to 7%?

Rakesh Sachdev

You mean why don't we take it down by 1%?

Dmitry Silversteyn - Longbow Research LLC

1% to 2%, yes.

Rakesh Sachdev

No. We took it down by 1%, 6% to 7% from 7% to 8% so I think it's a little bit of a reflection of what's been happening in the marketplace. We wanted to be perhaps a little bit more conservative, perhaps a little more realistic and we want to make sure, we've always been a company of trying to hit or exceed what we say whether the 6% to 7% is closer to the 7% or the 7% to 8% is closer to the [indiscernible] you can decipher. I don't think it's a fundamental change [indiscernible].

Dmitry Silversteyn - Longbow Research LLC

I'm just wondering what is the signal that you're sending. That things have gotten worse, that they have not recovered? That things have gotten more competitive?

Rakesh Sachdev

No. I think it's a little-- perhaps most importantly, it's a reflection of maybe what's happening in background market.

Unknown Analyst


Rakesh Sachdev

There are people on the webcast, so can we ask some questions from them?

Unknown Analyst

[indiscernible] $40 million to $50 million in 5 years. At what point -- some of that is theoretical on what you'll be able to do to get it. When do you think you'll actually start getting the real world results that show that your theory on the synergies and what you can do are occurring and you're on that path or off that path if that isn't that bad?

Rakesh Sachdev

That's a very good question. So the question is when do we start to see tangible synergies as we go down this path of getting [indiscernible] sales and we have not developed -- we have developed plans and I would say that I think we should start seeing something that's fairly nominal next year. I don't see something this year but really, it's going to take 2 years because the sales cycle tends to be a little longer in this business. We understand [indiscernible] but I would say that [indiscernible] the year after next, we should start seeing [indiscernible] I don't know if that Chelli or Gilles wants to comment on that.

Gilles A. Cottier

So exactly, I think that's these customers that we are looking after beginning with synergies that both Chelli and I were just talking about, they are these -- the color -- these people, before they make a decision, it takes time. We are acutely aware of this. But what I can tell you is that it may take time to get it. But when you get the order, and say, take a $1 million order, that's not just $1 million order, that's -- the value of that is probably $10 million to $15 million because you've got it from many [indiscernible] and that's what is going to be the key, with -- especially with large by our former customers but on both sides. Because when you are validated from their profit, in media, the new combination business and the testing services, you're there for the long run. That's what's really important and what's going to drive the sales synergies in these big customers. You want to add something, Chelli?

Chelli Faletti


Gaji Balakaneshan - The Buckingham Research Group Incorporated

Gaji Balakaneshan from Buckingham Research Group. Kirk, you mentioned that we should watch for the reinstatement of the tax credit in the U.S. If we're to see that, how would you expect that to impact Sigma and what sort of timeline would it be?

Kirk A. Richter

Well, I think, similar to what we've seen in prior years, in our guidance this year is for a 30% to 31% tax rate. If the credit is not reinstated or slightly to be towards the higher end of that, so we purposely gave that range to accommodate that. That said, that $0.10 disadvantage is probably 30% to 40% related to what may happen with the R&D tax credit because it follows the pattern, it has over the last couple 2-year cycles. It always comes back in the fourth quarter. But with the election year, that may take a few things off the table at this point so all we can say is stay tuned, you will know as soon as we do, what the government plans to do this year.

Unknown Analyst

Steve Willoughby [ph] with Cleveland Research. With opening up Taiwan and Wuxi, what other capacity expansions are you guys planning going forward? What's the need for additional capacity expansion now that you've opened these up?

Rakesh Sachdev

So I would say that we still have some plans to further expand [indiscernible] clearly with this we have built capacity in. The focus of Eric and his team over the coming several months and quarters is certainly going to be to start selling of Wuxi. [indiscernible] I can tell sellers are already coming and talking to us about sort of Taiwan's already full although he has to spin it up. And because we are seeing growth opportunities beyond the next [indiscernible]. Frankly, the other players where we are going to get [indiscernible] the extent [indiscernible] and the industrial media of our biological drugs [indiscernible] so there are several of our products that are growing very fast. Now, it's a matter of time before [indiscernible]. We can even do that at the appropriate time. It's all part of our master plan. I would say, I would just make a general comment that generally, as you see expansion and placing of capacity, it's likely to be outside the U.S., as you probably would expect. But it's still maybe in certain parts of Europe because there are a lot of [indiscernible] still not very comfortable buying everything from Asia, so we are going to still put some capacity in the U.S. and the European regions. But obviously for the most part, the acceleration of the [indiscernible]

Unknown Analyst

I'd like to fill up the new plans in Taiwan and Wuxi the capacity...

Rakesh Sachdev

I want to hear you ask me. Okay, come on.

Unknown Executive

The Taiwan facility is a multipurpose facility and there are dedicated streams of specific products. So the facility itself with is vying even for further expansion on site, and we planned it for several years of continued growth. So it really isn't a question of how fast we fill up any individual kettle, any individual stream. It's how do we resource that, how do we add the headcount to make sure our costs are in line with the growth and we'll do that in a measured way and then we've also -- it allows some further expansion. So it really isn't about a finite, how do you fill it up 80% in 1 year because it's really -- it's multiple process streams and we'll do it step by step over the next several years.

Kirk A. Richter

I'll add to that. It's going to be fast. The reality is, the way we've build the facility is it's modular so we can actually add capacity as we go forward. But if you look at the markets in Asia, there is a definite need for the capabilities that are localized for particular product segments and like I said earlier, we are underpenetrated in that area. We now have the assets, we have the model, the direct access to customers. We have the brand equity. So I think you'll hear more in the future about rapid expansion through these facilities.

Rakesh Sachdev

I understand Wuxi facility, and what have we constructed now because we have obviously, pretty large [indiscernible] that can accommodate [indiscernible] an extra $100 million of sales [indiscernible] mentioned some of that Taiwan facilities [indiscernible] less than that and the way it is now and as we get to those sales levels [indiscernible].

Unknown Analyst

It's Sean Witty[ph] . So Rakesh, just looking at the capital structure of the company, you're always at an all time high. Your ROE has come down, you've employed less leverage since the financial downturn in '09. So even after BioReliance, you're looking at net cash kind of neutral-ish. Why is that number not go higher over the next couple of years? Kind of discuss the board's mandate to run a more optimized capital structure?

Rakesh Sachdev

So the comment you made about ROE is at an all-time high, that's true. ROE or ROIC essentially [indiscernible] capital has been [indiscernible] very good [indiscernible]. The ROE by the way, goes up and down. There are couple of things that we don't control [indiscernible] fundamentally from the business standpoint [indiscernible] the ROE would be also going up but as you know, ROE is influenced by exchange rates and ROE is also influenced by share buybacks for 2 things [indiscernible] so that creates [indiscernible], if you would take those 2 out, the ROEs will also [indiscernible]. As we make acquisitions, sometimes acquisitions as you know has the impact of lowering ROIC, ROE. Since we have been making large acquisitions, it's going to have some small impact. But again, once we get the synergies, it should start going back up. So I think we feel pretty good on the return metrics we're getting on our balance sheet. We feel we have done that through growth and income. So you ask why has our return on assets really gone up. Well, it's really largely driven by growth in earnings, it's more so than what's happened to the assets. As far as free cash flow you ask a question, yes, I think that free cash flow, we have given the guidance of greater than $400 million. I get this question, why is it so low? I mean we should be supporting a lot more of our net income free cash flow and we will. I mean, typically, as we have said internally, because we are going to be investing in growth, we should be able to convert between 90% to 100% consistently upon that and through free cash flow. That's what we're going to do.

Unknown Analyst

My second question, I think you answered it. You're saying that the decline in your conversion ratio in '11, let's just say you hit your guidance in '12, that's more of a temporary capacity, working capital and fixed asset type of bump rather than...

Rakesh Sachdev

Are you talking about free cash flow?

Unknown Analyst


Rakesh Sachdev

Yes, absolutely. The free cash flow, the reason it went down slightly in 2007 was because we deliberately chose to increase our inventory. In fact, to grow growth. It improved -- we got the highest service level we ever had the [indiscernible] and drove growth and as we increased the localization on that, once we started doing the packaging ourselves, we will not need to stop the kind of energy that we saw. So I think it's done a beating. I think we will start seeing that our inventory would not have to go up that much. So our cash flow would come back to a more normal level.

Unknown Analyst

[indiscernible] follow-up. Actually a little bit of a different take on that question there. So your return on capital is high, it's going to dip down with BioReliance. I'm just curious. I have 2 questions there. One, specifically to BioReliance, the previous couple of owners had some issues with BioReliance. It's a bit of a lumpy business. So I guess, what the did you see that acquisition that you think -- to give you more confident that you'll be able to execute on that acquisition? And then the second is, it sounds like you're going to do more deals going forward, be more acquisitive. Can you just help us know what kind of return metrics you require from those deals? Are you -- are these kind of whack metrics or are you saying after 3 years, you want this investment to get X returns? Just walk us through those thoughts...

Rakesh Sachdev

So on BioReliance. Again, I'm not going to talk about maybe Chelli can. I'll ask Chelli [indiscernible] talk about that what happened more than 5 years ago. I think clearly, what we saw in the BioReliance essays business that was demonstrating good growth. I think it was in the right space that we wanted to be in. Chelli and his team has done an outstanding job. Last 4 years, they've selected and built a team that I think is [indiscernible]. And we liked it. So I know we got this question at the earnings call but we feel very good of what we saw, what we have, and that Chelli maybe, say a little more about why you think Chelli, this business is different over the last 4 years than it was before that?

Chelli Faletti

I got involved with BioReliance in 2007. The purchase from [indiscernible] tech so I did not experience life before that time. I can tell you though that BioReliance is a very different company today than it was when I first got involved in 2007. It's a very stable organization now, very stable management team. It's a different point in time, it's 5 years later. Our service delivery, I think, is very, very high. I think it's just really apples and oranges. To me beyond -- pre-2007 is ancient history. This is a nice market that we're in. We're highly differentiated. We are the major competitor in our market. I believe that again, this biomanufacturing support area is very fragmented. I think there is a tremendous opportunity for a large provider ourselves with Sigma-Aldrich to be seen in the marketplace as the reliable kind of provider that really, the marketplace has not had. These are difficult services and products to deliver. Very, very difficult and I think the marketplace thirsts after somebody that is really reliable, trusted and I think we're extremely well positioned.

Rakesh Sachdev

I mean, you're right. Like any service business, service businesses tend to be more lumpy than our traditional research [indiscernible] tremendous [indiscernible]. But just like many of the SAFC businesses, because there's long-term trend but we didn't buy this company for [indiscernible]. Your second question was are we going to be doing more M&A and sort of where the financial metrics that -- how do we look at these acquisitions? So yes, I mean, we are always looking at I would say, for the most part, we're looking at bolt-on acquisitions [indiscernible] I would say a fairly healthy pipeline of candidates and Karen and her team drive that every day. As far as the financial metrics, we know the performance of Sigma-Aldrich today. Well, it's not lost in us for making acquisitions in this space. Sometimes we have to pay the premiums and the natural effect of that is that it has a diminishing -- it has an impact of reducing ROIC, sometimes [indiscernible]. But beyond that concern, as long as we have a game plan, if we bought it for a strategic reason and we can bring the ROIC back fairly rapidly, that's great. And in some cases, as we look at some other businesses as we are looking at [indiscernible] margin slightly lower but the ROIC is maybe 2x that of Sigma and so we have a whole gamut of companies. I would say that we clearly have the financial discipline in terms of making sure that we're looking at the margins, as well as the return on invested capital forward in the near-term when we buy a business and most likely to do over the next 3 to 5 years. I mean, typically, we would like to make sure that the [indiscernible] ROIC neutral in the [indiscernible] 3 to 5 year timeframe. Yes?

Unknown Analyst

A question on the stem cell business. It seems like there is opportunity to replace [ph] a lot of sell out and work and be done -- that would be by pharma. Is that -- how do you find the market opportunity there? I mean, is there -- is that couple of hundred million dollar market opportunity, if you look at what pharma is now spending on cell lines or do you think it will be individual kind of products that you'll sell in that market over a longer period of time?

Unknown Executive

I think the days are early. I mean, this is a whole new technology. I think we're one of the first groups actually to license the Kyoto patent, which is the way to transform a skin cell into an Induced Pluripotent Stem Cell. We're early adopters in this. We wanted -- and because we have the ZFNs, we can leverage it into those areas. I think what -- the areas I talked about were from clinical. There are other things that pharma wants to do. They want relevant screen modality. They want real tissues that they can screen your drugs against. They want to be able to get assays that are more relevant to humans. So it's hard to really measure the markets, it's very early.

Unknown Analyst

That is dynamic. I mean it seems like Lonza is going after that a little bit and you've got GE and others. I'm just trying --

Unknown Executive

Well GE is -- it started out in the embryonic stem cell and so they've got some cardiomyocytes out in the market. It doesn't look -- I haven't seen a lot of effort past that. That was the IT from you're on [ph] and there's really been a big move, really away from embryonic stem cells to adults. One of the reason is that they started out with embryonic stem cell is because that technology was first. I think most people will really see the fact that you can do adult stem cell developed is a much more valuable way to do it because you can take any skin cell from any population of any genotype if you want, whereas with this embryonic stem cell, you have it limited on the resources that's what you're on.

Lonza again, based on looking at it you mean, you're talking about contract manufacturing or you're talking about the clinic?

Rakesh Sachdev

On that development side...

Unknown Executive

Yes. Lonza's got 2 pieces. One is [indiscernible] cell business, they're on EDEX [ph] and the other is that they started to look into the sort of stem cell therapy business but we've seen what happened in the stem cell therapy business which is you're on [indiscernible] their program and I personally -- again, we look at it from Sigma as a research tool. It's just, as you can imagine, has a huge amount of value in the research in [indiscernible] I can't really comment on where Lonza is going.

Rakesh Sachdev

Okay. I know I'm being signaled. Continue the discussion over lunch. I know several of you have to leave and flights and it seems people are already leaving. So I think what we're going to do first is go to the next room and there's a buffet lunch, is that right, outside? And again, I want to really thank you and I know this whole team wants to thank you for taking the time and I hope you enjoyed the morning and we'll have some more discussions and if there are other questions, just feel free to give us. Again, I would love to make sure you understand our story and where we are going. So thanks.

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