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Sigma-Aldrich (NASDAQ:SIAL)

Q1 2012 Earnings Call

April 24, 2012 11:00 am ET

Executives

Kirk A. Richter - Vice President and Treasurer

Rakesh Sachdev - Chief Executive Officer, President and Director

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

Analysts

Paul R. Knight - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Jonathan P. Groberg - Macquarie Research

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

Peter Lawson - Mizuho Securities USA Inc., Research Division

Tracy Marshbanks - First Analysis Securities Corporation, Research Division

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

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

Daniel L. Leonard - Leerink Swann LLC, Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Daniel Arias - UBS Investment Bank, Research Division

Derik De Bruin - BofA Merrill Lynch, Research Division

Dmitry Silversteyn - Longbow Research LLC

John E. Roberts - The Buckingham Research Group Incorporated

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

Operator

Good day, ladies and gentlemen, and welcome to the Sigma-Aldrich Corporation First Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Now I'll turn the conference over to Vice President and Treasurer, Kirk Richter. Please begin.

Kirk A. Richter

Thank you, and good morning to all of you and welcome to Sigma-Aldrich's First Quarter 2012 Earnings Conference Call. With me today are Rakesh Sachdev, our President and CEO; and Jan Bertsch, our new Executive Vice President and CFO. Rakesh, I think you've got an opening comment.

Rakesh Sachdev

Yes, thanks, Kirk, and good morning to all. Before we continue with today's call, I'd like to say how pleased I am that Jan Bertsch has joined the Sigma-Aldrich management team and is now joining me for the first of, what I believe should be, many conference calls. She has a broad background in both finance and operations, with over 3 decades of progressive leadership assignments with several large global companies. In just a few short weeks, she's already becoming a key contributor, and she plans to participate in a variety of investor conferences and other meetings in the next few months. So I hope you'll have a chance to meet her soon. Kirk, let's continue.

Kirk A. Richter

Thanks, Rakesh. In today's call, Jan will lead off with a review of our first quarter performance. Rakesh will follow that discussion with an update on the activities that contributed to our first quarter results and our outlook for 2012. After completing those reviews, we'll open up the call for your questions and comments. We will be using a slide presentation as part of today's call. That presentation can be viewed on our Investor Relations website at www.sigmaaldrich.com.

Before beginning the review, I want to remind you that today's comments include forward-looking statements about future activities and our expectations for sales, earnings, cash flow and other possible future results. While we believe these expectations are based on reasonable assumptions, actual results may differ materially due to any number of factors, including the risk factors listed in our annual report on Form 10-K for the year ended December 31, 2011, and in the cautionary statement that is included in today's release and in our slides. We have no plans to update these forward-looking statements after this conference.

Also in today's conference call, we are providing information on non-GAAP financial measures. That information which consists of currency and acquisition-adjusted sales growth, operating income and related margins, net income and EPS results on both an adjusted and reported basis, and free cash flow reconciled to net cash provided by operating activities is also contained in today's earnings release which is posted on our website and in the appendix to today's presentation that begins with Slide 12. With that, I'll ask Jan to start with a summary of our first quarter results. Jan?

Jan A. Bertsch

Thank you, Kirk, and good morning. First of all, let me tell you how excited I am to be a part of the Sigma-Aldrich team. And I look forward to meeting you all personally in the near term. As reported in today's release, first quarter sales were $665 million, a reported increase of 5% over last year's first quarter and a new quarterly high for the company.

During the quarter, our recent acquisitions, primarily BioReliance, added roughly $25 million to our sales, and you may recall that we owned BioReliance for only 2 months in the first quarter. Excluding the sales associated with these acquisitions, we still achieved the highest quarterly sales in our history. Our organic sales growth, which excludes the impact of changes in foreign currency exchange rates and the benefit of our recent acquisitions, was 3%, and this was in line with our expectation. Our Research and SAFC businesses contributed to this growth at 4% and 1%, respectively. I'll comment on those increases shortly.

Acquisitions, primarily BioReliance, added another 4% to growth, while changes in foreign currency exchange rates reduced otherwise reportable sales growth by 2%.

Our first quarter operating income was the highest in the company's history at $172 million. Net income was $117 million, and reported diluted EPS was $0.96. Our adjusted diluted EPS which, in the first quarter of 2012, excludes $0.03 of onetime acquisition-related transaction costs, was $0.99, a 5% increase over diluted adjusted EPS of $0.94 in the first quarter of last year. 2011's first quarter diluted adjusted EPS excluded $0.01 of restructuring charges and $0.04 tax benefit from the release of some tax reserves.

Our effective tax rate for the quarter was 31.6% compared to 27.9% in last year's first quarter. The higher effective tax rate for the first quarter of 2012 compared to the same period in 2011 is attributable to nonrecurring benefits realized in 2011 from the reversal of an uncertain tax position reserve. We expect our full-year 2012 effective tax rate to be in the range of 30% to 31% compared to 28.6% in 2011. This increase in the effective tax rate in 2012 compared to 2011 is reflective of the higher level of reserve adjustments that resulted in the net tax benefit in 2011. These are not expected to totally repeat in 2012. Beyond 2012, we believe that our long-term effective tax rate could improve in excess of 200 basis points, given the strong business performance we're seeing in countries having a more favorable tax regime than the U.S.

Our first quarter free cash flow was a strong $112 million, as we converted 96% of our net income to cash. It was $21 million less than the amount generated in the first quarter of last year, primarily due to higher uses of cash for working capital to support sales growth in select markets and higher capital spending associated with new facilities.

During the quarter, we used cash of $389 million to fund 2 acquisitions, BioReliance and Research Organics. We used both internal cash and short-term debt to fund these transactions. We also returned $49 million to shareholders, including $24 million in dividends and $25 million in share repurchases.

Now let's review our sales performance for the first quarter of 2012. The 4% organic growth in our Research business was slightly higher than our expectation, even as uncertainties in the global economic environment and in pharma and academic research funding in the U.S. and Europe continued. Our research sales in the U.S. and Europe grew organically in the low-single digits. While our Asia-Pacific and Latin America Research business grew in the high-single digits. Additionally, our acquisitions of Vetec and the research portion of BioReliance contributed 2%, which was offset completely by changes in foreign currency exchange rates.

SAFC had its best quarter ever with record quarterly sales of $197 million. Organic sales growth was 1%, right in line with our previously communicated expectation. Our recent acquisitions, primarily BioReliance biological testing business contributed 9%, while currency reduced otherwise reportable sales by 1% in the first quarter. The lower organic growth is due primarily to the pre-buy in the SAFC Bioscience business in early 2011, temporary weakness in the LED markets and production capacity constraints in Hitech.

Our Supply Solutions business attains mid-single-digit growth during the quarter, led by the Asia Pacific Latin America regions, where we grew organically in excess of 20%. Our Pharmaceutical Manufacturing business for custom active pharmaceutical ingredients had another good quarter, with high-single-digit growth. We continue to expect sales growth in SAFC to move from low- to mid-single digits in the first half of the year to low-double digits for the second half, as additional capacity comes up online in Taiwan.

In the first quarter, our analytical chemistry initiative grew organically by 9%, as demand for our products continue to be strong, as we help our customers solve complex analytical challenges. Whether they're working in a Life Science research laboratory or in areas such as environmental analysis or food and beverage testing. Our acquisitions of Cerilliant and Research Technology Corporation continue to exceed our expectations, with both contributing nicely to the sales growth in the analytical chemistry initiative.

Additionally, in the first quarter, we extended our manufacturing and supply agreement with Honeywell, in Germany, assuring continued cost-effective supply of these analytical chemistry products to help support our product line and enable us to continue offering a comprehensive breadth of reagents and standards to customers around the globe.

Our Biology business, which grew by 3%, delivered overall as expected, showing moderate growth for our core Biomolecule and synthetic DNA business. The innovative and faster growing areas of our Biology business, which includes our zinc finger nuclease products, continue delivering double-digit growth in the first quarter, as we continue to invest in initiatives that are broadening the availability and breadth of our zinc finger offering to a wider group of customers through new and innovative applications.

Our performance in material science projects -- products for research continued its strong growth trend with high-single digit organic growth in the quarter. This growth came from all geographies but was led by the Asia Pacific, Latin America regions, where this business grew organically in the double digits. We're seeing strong growth across many applications for our material science products.

Geographically, our North American sales growth of 1% was impacted by the slower growth in SAFC sales, specifically in our Bioscience business and in our Research business, as pharma and academic research funding continued to be pressured by budget constraints. Acquisitions added another 4% to the growth in this region.

Sales in the first quarter in our European business grew 2% organically, with research growing 3% organically. Our International region, which includes the Asia Pacific and Latin America markets, had strong organic sales growth of 9%. In our focus markets of China, India and Brazil, combined first quarter organic sales growth was 13%. For the first time in many quarters, Japan also posted strong organic growth in the first quarter of 7%. The acquisition of Vetec increased reported sales in these focus markets by 11%.

Superiority in the Internet sales channel remains a key initiative. A key to this success is to make our site more relevant and more friendly. During the first quarter of 2012, we had 14.2 million visits to our website compared to about 11.4 million in the first quarter of last year, a 25% increase. Worldwide sales of Research products through the company's website were $232 million, and grew organically by 8% in the first quarter of 2012 when compared to the first quarter of 2011.

Our adjusted operating income margin for the first quarter of 2012, excluding the impact of acquisitions, was 27.6%, an increase of 70 basis points over the first quarter of 2011's adjusted operating margin. The impact of our recent acquisitions reduced our adjusted operating margin by 100 basis points, half of which is due to amortization of acquisition-related intangibles. Amortization of acquisition-related intangibles doubled to $6 million in the first quarter of 2012 compared with $3 million in the first quarter of 2011. The other half of the reduction in operating margins, as we've discussed previously, is due to the fact that these new acquisitions have lower operating margins than our base business. With this said, however, it's also important to point out that the return on intangible assets for our recent acquisitions is quite strong due to the highly efficient asset base in their businesses.

As previously mentioned, our free cash flow in the first quarter of 2012 of $112 million compared to $133 million last year. This reduction was largely due to higher uses of cash for working capital to support higher sales levels and higher capital spending. We continue to invest in the higher growth in emerging markets of China, India and Taiwan, to support our growing Research business and to meet the strong demand for our SAFC Hitech products, and are investing in our Milwaukee distribution center to better leverage operating efficiencies and to enhance customer service.

We expect capital expenditures of approximately $125 million for the full year of 2012 compared to $104 million for all of last year. And as you have read in our release, we have raised our full-year outlook for free cash flow to approximately $425 million, up from $400 million in our previous outlook.

Now I'll ask Rakesh to comment on some of the operating highlights in the first quarter, as well as our 2012 forecast. Rakesh?

Rakesh Sachdev

Thanks, Jan. I'm happy to repeat that our first quarter 2012 results set a number of new records. Our performance met and even slightly exceeded, in some instances, the expectations we've provided early in February. As Jan already reported, the $665 million of sales in the first quarter set a new quarterly sales record. The 4% organic growth in our Research business for the first quarter of 2012, matched what we achieved in each of the first 3 quarters in 2011, and was slightly ahead of our early expectations by a modest amount, assisted by stronger than expected sales in the Asia Pacific and Latin American markets.

Our growth rate with academia and government institutions, while in the low-single digits in the first quarter of 2012, was much better than what we achieved with this customer segment in the fourth quarter of 2011. And unlike in late 2011, when we were seeing our Research business with pharma contract, we saw it level out in the first quarter of 2012.

Aided by the acquisition of BioReliance, SAFC sales of $197 million achieved a new quarterly high. The 1% organic growth was in line with our expectation. Our first quarter operating and pre-tax income and diluted adjusted EPS also achieved new heights.

Our total company organic sales growth of 3% was enhanced with a 4% contribution from recent acquisitions, with the majority of that coming from the end of January addition of BioReliance. The addition of BioReliance's testing services coupled with the expanding biological product offering of Sigma-Aldrich, provides us a real advantage with our customers as we can now offer a vertically integrated, single-point offering of products and services that are critical to the drug discovery, development and manufacturing process. And the more recent addition of Research Organics, combined with a full quarter contribution from BioReliance, will enhance that growth contribution in upcoming quarters to more like a 6% quarterly contribution. Research Organics expands SAFC's buffer production capacity and its portfolio of pharma-grade raw materials.

In addition to the acquisitions, we have now completed adding new plant capacity in 3 countries. In mid-March, I was in Taiwan for the opening of our new multi-million dollar manufacturing plant that will produce high-quality precursors for LED and semiconductor applications. That added capacity is one of the key elements in driving SAFC's growth higher in the upcoming quarters of 2012.

On that same trip, I was joined by over 100 customers and guests in each of 2 ceremonies, as we celebrated the opening of expanded facilities of distribution and packaging in Bangalore, India, and a new facility in Wuxi, China. We now have the ability to provide localized packaging, analytical services and quality control for high-quality products. And this demonstrates our commitment to increase growth through localization in these rapidly growing Asia Pacific markets.

Our company's mission is to be the trusted and preeminent global provider to the research, laboratory and targeted commercial markets. These markets are broad and diverse, and are continually evolving as our customers are confronted with new realities. These new realities bring opportunities that we can take advantage of, as we continue to enhance our position in the global Life Science and high technology markets.

Over the past few quarters, many of you have asked about current market conditions, so let me address a few of the current challenges and provide a perspective. Global economies are less than robust and that factor is reflected in our current versus long-term sales growth expectations. Economic uncertainties across the globe have caused governments and funding organizations to reevaluate research spending. But after a brief period of funding uncertainty early in the fourth quarter of 2011, we now expect modest growth in funding for the balance of 2012 and this is helping us.

We have a positive outlook and see growth opportunities for our business. They may not be easy to come by but our focus remains to achieve growth above the market rate through both organic and inorganic means. Our markets are large with an addressable revenue base of over $100 billion. And we intend to find our customer focus with a total solutions approach for our largest customers and optimizing customer convenience through activities like e-Commerce enhancements for all customers.

Our industry remains very fragmented, thereby creating opportunities for the strong players, who are willing and capable of acquiring and integrating businesses. We believe there are excellent bolt-on opportunities for us. Pharma companies continue to look for more efficient business models to address their margins and capital intensity, and the trend toward outsourcing has continued across many functional areas of pharma. This is creating new market opportunities for companies like Sigma-Aldrich because of our broad product offering, unique manufacturing know-how and global footprint.

In addition to pharma outsourcing, the emerging markets continue to benefit from a strategic emphasis that the countries in these markets place on Life Science research. As one of the early entrants into these regions, Sigma-Aldrich has developed highly effective customer channels, both direct and through dealer networks, that are far superior to those of our peers. In Asia Pacific and Latin America, we have invested over $100 million in just the last 2 years to increase our capacity in these fast-growing markets.

In recent years, the pharmaceutical industry has started to shift its R&D pipeline towards the biologics-based compounds. Today, approximately 1/2 of the top-selling pharmaceuticals are biologics. The acquisition of BioReliance is one example of our efforts to address the shift with a stronger offering for the biopharma industry. BioReliance provides quality testing services for materials that enter the biopharmaceutical manufacturing process, complementing the products we offer for that same workflow.

Applied markets, such as food safety testing, environmental testing, diagnostics and forensics, offer excellent opportunities for growth that are less affected by economic pressures. Here we continue to focus on the high-growth segments of analytical chemistry and materials science to drive growth.

We are focused on growth through innovation and technology, through service enhancement and through expansion of what we already believe is an industry-leading global footprint. We like the lack of volatility that our diversified product portfolio and customer base provides, and recession-resistant nature of our consumable offering.

Now let me wrap up with a review of our expectations for the balance of the year. Consistent with our prior guidance, our organic sales growth is expected to be in the mid-single-digit range for all of 2012, with different rates in the first half of 2012 compared to the second half. After achieving 4% organic growth in the first quarter for our Research business, we expect a similar performance for the balance of the year. We believe that growth in emerging markets and the programs we have initiated in the faster growing segments of Research, especially in the analytical chemistry, biology and material science sectors, should enable us to achieve low- to mid-single-digit organic sales growth for all of 2012.

With 1% organic growth for SAFC in Q1, we continue to expect sales growth to achieve low- to mid-single-digit organic growth in the second quarter as it is impacted by the same tougher comps related to the pre-buy in the SAFC Bioscience business in 2011, a slightly weaker LED market and capacity constraints in Hitech, which will be progressively alleviated beginning in the second quarter as our new Taiwan plant comes online.

The BioReliance acquisition, which closed at the end of January, and the recent acquisition of Research Organics, should add 6% to our expected growth for the company in 2012. Currency exchange rates have changed modestly since Q1. We continue to expect that changes in foreign currency should decrease otherwise reportable sales for the full year by approximately 2%. Our outlook for adjusted diluted EPS remains at $3.90 to $4.05, excluding any restructuring, onetime transaction costs associated with the acquisitions and any other special charges. The anticipated impact of changes in foreign currency on our EPS is expected to be a headwind of about $0.10. While this is slightly lower than our prior outlook, we are maintaining our full-year guidance unchanged as we expect slightly higher spending and several strategic growth initiatives. The recent addition of Research Organics should largely be neutral to this EPS guidance but we have continued to include a $0.05 to $0.07 benefit from the addition of BioReliance.

Also reflected in the EPS guidance is the higher anticipated effective tax rate of 30% to 31% in 2012, that Jan mentioned, which will reduce otherwise reportable diluted EPS by about $0.10. If our sales expectations are challenged beyond what I reported today, we intend to launch contingency plans that will reduce costs, just as we have done in the past. We have increased our free cash flow expectation by about $25 million to $425 million, with net cash provided by operating activities at $550 million. We continue to expect capital expenditures of $125 million in 2012.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Paul Knight of CLSA.

Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division

Can you comment on where you are with the rollout of the Wuxi facility and your other, I guess, emerging market expansion activity right now?

Rakesh Sachdev

Sure. So we just inaugurated the Wuxi facility in March. We are -- and that's going to be a packaging and a quality control facility. We are not manufacturing today, that'll be the next phase. We expect -- the sales have already begun out of the Wuxi facility, although they're fairly nominal right now, and they will be ramping up really in the second half of this year. I think they'll be still fairly modest this year. I think I've said in one of the earliest calls that this facility can support about $100 million in sales growth. That, obviously, won't happen anytime soon but, I would say, in -- probably in a couple of years, we'll be sort of getting to significantly higher numbers. Again, the Wuxi facility has started to achieving sales in the local markets that, today, we are unable to compete in. And -- so we're pretty excited about what's going to happen in China. The India facility that we expanded, we've expanded our distribution center, that's already paying very significant dividends. What I can tell you is that our growth in India is on -- has been just incredible. The first quarter growth in India has been substantially ahead of any time in the last couple of years. And it's primarily because our service levels have improved because of this new distribution facility. And so we're also very excited about what we're going to see in India. So those are the 2 that are the major investments. The third one is the Hitech facility in Taiwan, and we also inaugurated that site last month. We are going to product approvals and we expect to start shipping product later this quarter. And really, again, as we said, this is going to be a second half story for our Hitech business over the Taiwan plant and we're very, very optimistic that, that's going to drive a good piece of the growth of SAFC this year.

Operator

The next question is from Jon Groberg of Macquarie.

Jonathan P. Groberg - Macquarie Research

One quick clarification, Rakesh. Do you think that the extra day added much to your sales growth on that research side?

Rakesh Sachdev

We did not have an extra day. I know that somebody mentioned that earlier. We did not have an extra day in the first quarter of this year versus last year's first quarter. I think it's the way the weekends fall and we'll be happy to show you off-line that we had the same number of working days in both quarters.

Jonathan P. Groberg - Macquarie Research

Okay. And then, if you can maybe just talk a little bit about more where you're investing because you said, organically, it looks like your EPS expectations are down a little bit because of the benefit from the slightly less negative impact from FX. So where are you focusing those investments on, and how should we kind of monitor those?

Rakesh Sachdev

I would say there are sort of 3 areas that we have probably putting a little more emphasis. One is, we're adding a few more sales people in our emerging markets because we're seeing the opportunity that we want to take advantage of. E-Commerce is the other area where we are accelerating some of the changes we want to make and improvements we want to make to our e-Commerce channel that requires a little more of outside consultants because -- but it's -- we're pulling that -- some that forward. And I would say the third one is -- we're also investing a lot more in our ERP systems. We are an SAP shop and we are trying to get to the next level of ERP. And so we'd be investing a little bit on the IT side as well.

Jonathan P. Groberg - Macquarie Research

Okay. And going forward, are you no longer breaking out the research side the way that you used to, obviously, you now just talked about research consumables broadly?

Rakesh Sachdev

Yes. So if you look at the Research business in the first quarter, what I would say is that, across the board, we had an improvement in the first quarter compared to the fourth quarter. So if you look at our analytical business, although we did fairly well in the analytical business in the fourth quarter, we grew about 6%. We grew close to 9% in the first quarter. I would say, if you look at our biology businesses, they were also up by about a 1%, 1.5%. So if you look at our product segments, I would say we make progress on all fronts. The only product segment where we still have pressure is our chemistry business. This is just our traditional chemistry business. And I think that's being affected because a lot of that business that we do with the large pharma companies, they're moving their business and, actually, they're also reducing some of the chemistry research. But if you look at our analytical business, our biology business, our materials science business, even our lab essentials business, they all grew very nicely in the first quarter. I would say, by end markets, if you will look at -- just by what we did on the end markets, we had a lot of pressure in the fourth quarter when we looked at academia and government institutions. And overall, I think we grew at about 1%. In the fourth quarter, our growth was almost 3x. We grew in the 2.5% to 3%. So we saw fairly significant growth. And that came from the strength in the U.S. The others are fairly flat. The pharma business, again, on the research side, which was contracting, and it shrunk in the fourth quarter, that was level in Q1. So that was a good sign. And I would say the other businesses were slightly up as well, other end markets. So we are seeing some slight improvement in most of the markets. I would say our custom pharma business and SAFC, now this is not talking about research, we had double-digit growth in Q4 and we saw another close to double-digit growth in Q1. So -- I would say there's still a lot of pleasure pressure on the university and government side, that's 1/3 of our business and that's one that we will watch carefully and see how that goes. But so far, I think we're encouraged with what we saw in Q1 versus Q4.

Operator

Our next question is from Quintin Lai of Robert W Baird.

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

First, we'd like to offer our congratulations and welcome to Jan. And I think, Rakesh, to you also, I think congratulations are kind of in order because a really solid quarter given your toughest year-over-year comp from last year. As you look at the pacing, did you notice any changes? I mean, did the business improve, January through February, March or was it kind of just a steady pace?

Rakesh Sachdev

I think it was fairly steady, Quintin. I can't say that we saw a trend within the quarter. I know it was fairly strong in the early part of the quarter because, I think, at that time, there was some of the uncertainties have been lifted. But I wouldn't say that March fell off. I mean, I think March remained pretty much was what we saw in the quarter as well.

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

One thing that caught my eye was, when you talked about the online business, 25% more visits, 8% more sales. Is that coming from some of your new markets or is it coming from just getting current customers to buy more? I'd like to get a little more color on that.

Rakesh Sachdev

I think it's coming across -- we are obviously, doing a better job now penetrating the e-Commerce channel outside of the U.S. and the emerging markets. So a lot of the eyeballs that come to our website are coming also from outside of the U.S. and Europe. And I think with what our e-business team has done over the last, I would say, 12 months in putting a lot more content, making the search capability a lot easier, I think, it's drawing more people. So yes, it's a combination of many things.

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

And then final question for me is that, it sounds like that the initial integration of BioReliance is going well and then now with the Research Organics. I guess Rakesh, what do you think about in terms of M&A pipeline for the near-term for you?

Rakesh Sachdev

Well, as we have said even as of last analyst meeting, our M&A pipeline remains fairly robust. We are, obviously, have to be very careful about what acquisitions we make, how fast we make them, because they have to be integrated. I think the BioReliance and the most recent acquisition of Research Organics, which is very much up our alley, are absolutely the right acquisitions. Down the road, we'll continue to look at opportunities. And if there are some that makes sense and the timing is right, we will act on it.

Operator

Our next question is from Peter Lawson of Mizuho Securities.

Peter Lawson - Mizuho Securities USA Inc., Research Division

Rakesh, just on India. It sounds like you didn't get any impact from the weak rupee. Was there any caution around Indian CROs or generics?

Rakesh Sachdev

No, not really. I think, in our case -- I'll tell you our India business is now growing over 20%. It grew in Q1. We expect this full-year to have close to 15% to 20% growth. So while the business, with some of the CROs is down, because the CROs are under quite a bit of pressure, not just in India but also in China. So we are opening up more markets and our SAFC business is frankly also growing in places like India and China. So it's not just the research business. We are growing our SAFC supply solutions business nicely in those countries as well.

Peter Lawson - Mizuho Securities USA Inc., Research Division

Then on the NIH government expense 2012, I know it's only a small fraction of your business, but what's your outlook there especially for tail-end of year? And you work with customers to potentially reduce that slowdown.

Rakesh Sachdev

Boy, you know that's a hard question. I -- there's so many uncertainties and there's particularly pre-election. I mean, at least we know for this year there's stability. The question, obviously, on everybody's mind is what the NIH funding is going to be in the future. Now I can tell you and I think we have said that our exposure to the NIH funding is fairly nominal. If you look at our total business that we do, that is somehow impacted with NIH funding, I would say it's less than 10%. It's probably a lot less than that, probably closer to 5%. So while those uncertainties persist, we're not banking on that number being great or less. So we just lay it out and see how it plays out.

Operator

Our next question is from Tracy Marshbanks, of First Analysis.

Tracy Marshbanks - First Analysis Securities Corporation, Research Division

Just a couple of quick ones on business lines to make sure I understand. In SAFC, obviously, slower in the first half with increase in organic in the second half. But could you just take me through the dynamic of weakness in LED, but capacity constraints with capacity coming on, how you look at that playing out?

Rakesh Sachdev

Sure. Again, I think it would be good to just sort of recap what we do with LED. So the LED has 3 primary drivers: one is it's correlated to the device growth that uses LED backlighting. It's your TVs and laptops and cell phones; the second area where is -- the penetration of -- rate of LEDs into TV backlighting itself; and the third one is, general lighting growth of LEDs. And I would say that in the first quarter, there was some correction in the inventory on the TV side. We then see a reduction in LED demand, it just took a pause. The LED market is projected to still grow huge. In 2011, just to give you an idea, there was 70 billion units of LED dies. That's what we look at. In 2012, that's expected to grow 20% in units. But if you really look at the area at which we deposit chemicals, that's what's important to us, not necessarily the units. It's the area on which we do the deposition. That's likely to grow close to 35% to 40% in 2012. So it's huge. The growth is coming. There was a pause here. Our Taiwan business is, as I said, it's now up. We're going to start shipping products later this quarter, and we expect that -- if you -- what we expect is that, if you look at the second half versus the first half, our LED business, our shipments are going to be, I guess at, at least 40%, 50% higher.

Tracy Marshbanks - First Analysis Securities Corporation, Research Division

Okay. And the second question. In the custom pharma API business, business has been doing well. If you just take a look at either your pipeline or out in the future in that business, do you see strong support for that trend continuing, and maybe a couple of the reasons that may be true for you versus others?

Rakesh Sachdev

Well, we put new facilities in Wisconsin, in Madison, we put a new API facility there. And we also got a facility in Israel. The sales cycle sometimes for -- running this business as long and we've been working quite a bit with our customers, and they've all been very impressed with the investments we have made. And finally, it's starting to pay dividends. So which is why we saw the growth we did in Q4 and the growth we did in Q1. So we remain cautiously optimistic that we will be able to start increasing the utilization of these plants and doing more business on the custom pharma side.

Operator

We'll get the next question from Mike Sison of KeyBanc.

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

Nice start to the year and congrats to you as well, Jan. Rakesh, you talked about your ability to reduce cost if demand slows. If that occurs, where would you see it first? And maybe, just give us a feel of what worries you on the demand front.

Rakesh Sachdev

Well, what worries me is I think what worries most people is -- I mean, there are uncertainties. I mean, there are uncertainties around funding, which creates a certain mindset with our customers. But as I said, our business is somewhat recession-resistant. We don't expect, at least the research side of the business, to change in any dramatic way. On the SAFC side, again, we expect niche markets that have a natural growth. I mean, whether it's biological drugs or LEDs. So we feel pretty good where we are. Of course, if there's a global meltdown, which I don't see that happening, it could have an impact on our SAFC business, or parts of it. But -- yes, I do worry about what's going to happen to the economies and how that might affect our business. But so far, based on kind of what we are seeing, that concern is somewhat muted. What was the other question?

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

That was just one question. Then the second one I had for SAFC was -- looks like the visibility for improvement in volumes as the year progresses is pretty good given its new capacity for Hitech business. But does that imply the growth in SAFC pharma, bio and supply solutions will be, let's say, a bit more sluggish than Hitech?

Rakesh Sachdev

Well, Hitech will clearly have the highest growth because that's where we have put the capacity. And I would say that the supply solutions business is generally tends to -- and that's a big part of SAFC. That tends to grow in the middle -- mid-single digits. I think the others will grow nicely in the second half as well. So I would say Hitech will be the highest growing business and then it will be followed by pharma and bioscience and then supply solutions.

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

Last question for Jan, you sort of inherited a pretty well-oiled machine here. Where do you see some layers of improvement, on your end, and any thoughts on acquisitions, given you've also inherited a great balance sheet?

Jan A. Bertsch

Right. Well, it is nice to move to a company that has a lot of -- is a well-oiled machine, as you mentioned. But in any company, there's a lot of opportunities, I think. From my vantage point, we're focused very strongly internally here on improving our efficiencies, and we'll continue to do that. Very important to us as we go forward and as we grow the company. As far as the acquisitions go, either bolt-on acquisitions that enhance our channel distribution or businesses that help us achieve above-market growth, clearly, there's a lot more opportunities for smaller-type acquisitions in our space than larger ones. But we look at the strategic value of all the opportunities that we have in our pipeline and, based on that, will depend where we can drive it up, the greatest value.

Operator

And our next question is from Tycho Peterson of JPMorgan.

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

Hey, question on the new capacity addition just to start off. Can you just give us a sense as to how much of that you have visibility on in terms of customer orders? In other words, can you pre-sell that capacity? And maybe just talk about how you think about mix for customers out of those facilities in terms of shortened versus longer-term contracts.

Rakesh Sachdev

Yes. As you might know, when we made the investment in our facility, in the SAFC facility, in Taiwan, we did that only after conversations with a number of our customers. And we -- in some cases, we entered into long-term agreements. So we have visibility with several of the customers. We don't always have long-term contracts in many cases. We choose to have capacity available without being contractually bound. So in those cases, we can typically get slightly higher prices. So we have some visibility or that the -- in the SAFC business, on the Hitech side, I would say but things around the Hitech business can change. If there's a global recession, things slow down. If there's an inventory correction, it slows down. So -- but so far, based on the discussions, and we have constant discussions with our customers, whether it's in Asia, mostly in Asia, we know what the demand pattern is like, we'd love to -- I like, at least for the next 3 months to 4 months.

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

Okay. And then one of the investments you talked about to a question earlier was around e-Commerce and, obviously, this is something you highlighted a lot in the analyst day including a push more into labware. Can you talk about the competitive barriers there? I mean, we've seen Amazon talk about their Amazon supply business yesterday. Just talk about how you think about the competitive barriers for e-Commerce and are you able to give us any color on what the gross and EBITDA margin is for that business specifically?

Rakesh Sachdev

Yes, so I understand that Amazon made an announcement yesterday. Obviously, we'll see kind of what that is. I understand it's largely for labware and -- we have a way -- what we do is we supply highly specialized products for the most part. And in many cases, our customers come to our website for content, they construct their experiments, they do searches on different types of molecules and chemicals, and there are compliance issues related to our products that we sell, how they are packaged, how they are shipped across borders. So the supply chain that we live in is highly complex and it's not like selling a simple piece of product. So that gives us the strength. When you look at our e-Commerce, coupled with our supply chain and the distribution capabilities that we have, all give us tremendous strength that, I think it's tough for somebody to emulate. We don't sort of talk about our gross margins, the margins for our different products. I would say, generally, most of our products are within a certain band of margin. So our gross margins are 50%. I mean, they could vary all the way from 35% to 70%. But we would not -- we typically don't hold handle product that give us much lower margin. And of course, we'd like to be on the higher side for everything that we do. But that's not always possible.

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

Okay. And then last one, I think you called out some decent strength in Japan around 7% or so. Just can you talk about -- was that all kind of the March fiscal year ending and budget flush or maybe just talk about sustainability? Is that real strength?

Rakesh Sachdev

No, so that's a good point. So last March, when the tsunami hit, we benefited some. But I would say a good part of that 7% growth was real strength. It wasn't related to a weaker comp, March versus March. And I would say the big thing that's happening is we have -- we are making substantial investments in working with our dealers in Japan. We reduced the number of dealers to having more strategic dealers, and I think that's making a quite a bit of difference in our business and the success that we are having in Japan. And we're hoping that, that's going to continue to play out.

Operator

Your next question is from Dan Leonard of Leerink Swann.

Daniel L. Leonard - Leerink Swann LLC, Research Division

Only one question. The growth rate in China, India and Brazil, while strong, was a little bit lower than what you've been reporting in prior quarters. I just want to clarify that, that was consistent with your expectations and doesn't reflect any incremental -- economic sensitivity in those regions.

Rakesh Sachdev

No. In fact, I'll tell you it was a little lower and the reason it was a little lower was of Brazil. It had no bearing on so -- the growth in Asia-Pacific remains constant. I mean, it's -- what we saw was a slight weakness in Brazil, but also that a timing issue. We had a number of -- some shipments that will take place in Q2 with certain customers, but Brazil growth was weaker than in the prior quarters. No question about it, and that's what caused some of the reduction.

Operator

The next question is from Isaac Ro of Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Just trying to go through the math on the acquisitions, Rakesh and Jan, specifically regarding BioReliance. If you could help us maybe tease out what components of that go into Research versus SAFC, that'll be helpful. And specifically, just trying to make sure that the run rate you guys have that business on was on a positive trajectory relative to the year-over-year comp.

Rakesh Sachdev

Yes, so I can give you an idea, Isaac. So the biological testing business is being captured in SAFC and that's approximately 80% of BioReliance's business, approximately. The other 20% of BioReliance is the toxicology studies that they do and the animal health services, and that's in Research, because really it belongs to Research, and that's how we split it. And I would say, as far as the outlook, we are maintaining what we said when we acquired BioReliance, of achieving the growth and the EPS contribution to the company. If you owned the company for only 2 months, so obviously, there's a lot of good work being done around the integration plans and moving this forward.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Fair enough. And then just second question. Generally speaking, we've obviously seen lateral commentary from other companies in the industry, mostly in equipment side, about pharma spending patterns, year-to-date CapEx being a little soft. Can you maybe comment on the visibility you have just given the nature of your business in that end market in particular, and the confidence you have in the ability to see growth in that end market this year?

Rakesh Sachdev

Yes, so, I really can't comment on sort of how do you think about capital spending for equipment, I can only infer that they might be tightening their budgets, but that's a question that, I think, I'm sure, you're going to be asking the equipment companies. I can tell you on the consumable side, I think a lot of churn took place last year. You probably know that pharma companies were shutting down, R&D facilities in the U.S. and Europe. They were reducing the number of research scientists. I would say a lot of that -- there's still some more that's going to take place. But I would say that, as I said, as we were seeing the impact of that in 2011, in 2012, we've started the year at level. So we're not declining, we actually saw a slight growth on the pharma side on the consumables. I think it's too early to say what the rest of the year is going bring, but we think that we are in the late level playing field with pharma, at least when it comes to consumables.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Got it. And then maybe one last question, you see now the level disclosure on various business segments within research has come in a little bit. And I was hoping maybe you could offer, for the combined business, what you think the secular growth rate will be, as a component of the total growth rate you guys have offered for the business.

Rakesh Sachdev

Same, or -- I mean, so if I understand your question.

Operator

Our next question is from Dan Arias from UBS.

Daniel Arias - UBS Investment Bank, Research Division

Just curious if pricing during the quarter was in line, historically, with what you guys have done in the first quarter?

Rakesh Sachdev

Yes, I think it was in line.

Jan A. Bertsch

Yes, historically, 1% to 2% and it's been pretty much in line. That's our expectation.

Daniel Arias - UBS Investment Bank, Research Division

Okay. And I'm not sure if I missed it. You guys have highlighted zinc finger over the last couple of quarters and certainly that was one of the focus at the investor day. Just wondering how that product line performed?

Rakesh Sachdev

We had an all-time high on zinc finger sales in the U.S. in Q1. It was -- I don't have the numbers at the tip of my fingers, but I think it grew at least 30%. So it's really where we are seeing the most growth around the zinc fingers is in the U.S. market and we're hoping to sort of replicate that in the European markets, although I would say there it's been a little slower than the U.S.

Operator

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

Derik De Bruin - BofA Merrill Lynch, Research Division

So a lot of my questions have been answered. So I'm just going to tweak around the edges here. So when you look at your APLA sales in your research chemicals business, your research segment, so last year, you grew organically in that business about 3%, about 7% of that was driven by growth in the APLA. Give us an idea on -- you have never worked in that kind of the traditional biology, the innovative biology. What is the difference in the customer spend in those different segments, particularly in sort of in the higher research tools in the emerging markets versus kind of your developed markets? Is the traditional biology heavier on these markets, innovative? I'm just looking for a little bit more clarity on -- when we look at kind of how we model that, I would assume your innovative biology has much higher margins for that. I'm just looking for a little bit of clarity in terms of where the group -- where those markets are.

Rakesh Sachdev

Yes, so if you look at the emerging markets, there are several things that are driving -- fueling that growth. One of course, is what it is obvious that the large global pharma companies and other companies are doing, moving more of their research into the emerging markets. So they have captive centers. They are also using CROs. And so clearly, that's fueling growth, we talked about pharma outsourcing. I would say the other has a local company in Asia. So there are very some very successful local businesses in Asia, who are -- also have aspirations of doing more research across all sciences. And I think that's fueling the growth. And I would say the third thing is that, that the governments themselves, whether it's India, China, they're all talking about doubling their spending in research over the next few years. So there is -- I think, if you put all those 3 together, the environment is still likely to be fairly positive in the emerging markets. Now thinking of the growth, I would say for us in the emerging markets is pretty much what we sell in the U.S. and Europe, with the exception of the real highly innovative biological products. So our zinc finger sales and other products today are obviously, proportionately less in the emerging markets. But having said that, I would say that our margins, in general, of the products that we sell in the emerging markets are as good, if not better than the margins than that we earn in the U.S. and Europe.

Derik De Bruin - BofA Merrill Lynch, Research Division

Okay. How much of -- just from that line of -- keep me along this line, how much of your sales into the emerging markets are from multinational corporations expanding versus domestic build-out?

Rakesh Sachdev

I don't have that with me at the moment. But why don't I give that to you off-line? Because I just don't have an exact breakdown on that. I don't want to give you a wrong answer.

Derik De Bruin - BofA Merrill Lynch, Research Division

Okay. And your guidance is not -- just one final comment on guidance, your guidance is not assuming -- or how does the R&D tax credit figure in to your guidance for this year? Is that included within the higher tax rate or is that not in?

Jan A. Bertsch

Yes, the R&D tax credit, right now, we're providing guidance range of 30% to 31% effective tax rate. So if we do receive the credit, it will help us push to the lower end of that tax rate. So that guidance that we're providing does include it in there.

Operator

Your next question is from Dmitry Silversteyn with Longbow Research.

Dmitry Silversteyn - Longbow Research LLC

Most my questions have been answered, but I just want to clarify a couple of things. First of all, what is your interest or interest expense expectations for the balance of the year?

Jan A. Bertsch

Interest expense for the total year is about $5 million.

Dmitry Silversteyn - Longbow Research LLC

Okay. So we're basically looking at sort of the first quarter run rate continuing through the year?

Jan A. Bertsch

That's correct.

Dmitry Silversteyn - Longbow Research LLC

Okay. And then secondly, can you -- it looks like you've delivered about 3% organic growth, a little bit less than that -- actually right around that, in the March quarter. And you're going to get obviously close to your 6% goal in the back end of the year, as you get a ramp-up in SAFC business. But going beyond that, if you look at kind of 2013 and beyond, assuming that easy comps don't help you with SAFC in 2013, what has to change in the marketplace for you to get to your 6% to 7% organic growth goal? Or conversely, which one of your businesses have to get the scale to be a meaningful contributor for you to allow to get to that growth level?

Rakesh Sachdev

Yes, so Dmitry, as -- you're right. As we talked at the investor day, clearly for us to get to that 7% mark, SAFC has to come in at the 8% to 10%. We believe that we have sown the seeds to getting that with the investments that we have made. Now we also need to have the research business deliver 5% to 6% growth. And as you correctly pointed out, we achieved more like a 4% growth. And so the question is how do we go from 4% to the 5% to 6% growth in research? And I think part of that will have to come from some improvement in the markets. We know that there are some constraints in the market. Part of that is going to come from our growth in the emerging markets. We've been making investments there. Clearly, I think that's going to become a bigger driver of our growth. And I would say the other part that we have been working very hard at is our innovative products in the faster growing areas of analytical chemistry and biology and material science. And as they become a bigger piece of that -- so a number of things have to take place. We have plans on each of the building blocks to get us to the 5% to 6% and that's what we will be aiming for.

Operator

Your next question is from John Roberts of Buckingham Research.

John E. Roberts - The Buckingham Research Group Incorporated

Rakesh, Jan. Heard the comment a little differently on the web-based sales you're now giving the growth rate in the absolute dollar amount. So not sure this is right, but are the off-line sales, the non-web-based sales flat year-over-year? And should we start thinking as we go forward of the next year or 2 years that we'll have a decline in the non-web-based sales that you should start taking cost out or thinking about the catalog and tele-ordering infrastructure and scaling that back down?

Rakesh Sachdev

Yes. We already have been able to take costs out. I would say that some of this is, obviously, a shift that takes place from the traditional ordering of using faxes and phones to the web. And I would say that in the last maybe 2 or 3 years, we have taken out at least 100 people who do the manual work of taking orders. So I think we are able to take cost out. And as we push more business through the Web, we will be able to do it more efficiency.

John E. Roberts - The Buckingham Research Group Incorporated

Would you agree we're kind of turning the corner where the non-web-based should probably not grow going forward?

Rakesh Sachdev

No, I wouldn't say that. Not at all.

Operator

The next question is from Jon Wood of Jefferies.

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

This is actually Brandon Couillard in for John. This will might be for either Jan or Kirk. Can you speak to the incremental $25 million of operating cash flow you anticipate for the year and the source of that incremental improvement despite what appeared to be a spike in DSO's in the first quarter?

Jan A. Bertsch

I think that, first of all, I think our performance in the first quarter is good. As I mentioned, we converted 96% of our net income to cash. We've got slightly better performance from operations, we got Research Organics and BioReliance in there. And based on the forecast that we've seen for the balance of the year, from our operations on our net cash, provided by our operations from -- I think that level of incremental cash flow is warranted. We're keeping our CapEx spending at the level that we had anticipated earlier in the year. I think based on where we are today and what we're seeing, we're comfortable with increasing that.

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

Okay and just on clear, looks like the Research Organics deal actually closed late in the first quarter and is it fair to say that, that business contributes to about $25 million to revenue for the year? And then on the amortization front, how much of an impact from the acquired intangibles was embedded in your prior 2012 EPS outlook relative to the $0.15 impact you called out in the release today?

Jan A. Bertsch

Well, our -- first of all, from a purchase accounting standpoint, we had $0.07 in last year and we've got $0.15 in for this year for amortization. The bulk majority of that is BioReliance. And we've got the accounting for BioReliance is substantially complete and we've got some information in the 10-Q that you'll see later today when we file it, related to the detail and the goodwill and the intangibles. So what else can I -- I think that the amortization for BioReliance was about $0.02 in the quarter, in the first quarter.

Operator

We have a follow up from Isaac Ro from Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Apologies for the confusion before. I just want to clear up the question I asked about the growth rate. I think what you're asking was what I meant by the assumptions there and specifically I wanted to know if you could maybe aggregate what you think the secular organic growth rate will be for the research business. And the reason I ask for that is in the past, you guys have given a little bit more color on the various components that you're now not breaking out.

Rakesh Sachdev

Yes. I think we're still expecting the secular growth rate, how it's going to be different in the different regions. But I would say overall, globally, probably in the 3% -- 2% to 3%.

Operator

Thank you. There are no further questions. I like to turn the call over to management for any closing remarks.

Kirk A. Richter

Sure. We want to thank everybody for their participation today. We look forward now, we expect to release results for the second quarter of this year before the market opens on July 24, and we'll follow that with a conference call that same day at 10:00 Central Time. This concludes today's conference.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect, and have a wonderful day.

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