Beckman Coulter Q4 2007 Earnings Call Transcript

Feb. 8.08 | About: Beckman Coulter, (BEC)

Beckman Coulter, Inc. (NYSE:BEC)

Q4 2007 Earnings Call

February 8, 2008 8:30 am ET

Executives

Allan D. Harris - Director, Investor Relations

Scott Garrett - President, Chief Executive Officer, Director

Charles P. Slacik - Chief Financial Officer, Senior Vice President

Analysts

Quintin Lai - Robert W. Baird

Jeffrey Frelick - Lazard Capital Markets

Peter Lawson - Thomas Weisel Partners

Dave Clare - Piper Jaffray

Miroslava Minkova - Bear Stearns

Bruce Jackson - RBC Capital Markets

David Lewis - Morgan Stanley

Jon Wood - Banc of America

Tycho Peterson - JP Morgan

Operator

Good morning. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to Beckman Coulter's fourth quarter and year-end 2007 conference call. (Operator Instructions) I will now turn the call over to Mr. Allan Harris, Director, Investor Relations. Sir, you may begin.

Allan D. Harris

Good morning and welcome to the Beckman Coulter fourth quarter and year-end 2007 conference call. On our call today are Scott Garrett, President and Chief Executive Officer; and Charlie Slacik, Chief Financial Officer.

During the call, there will be forward-looking statements on a number of subjects that are based on the company’s current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially.

Today’s press release, our 2006 annual report, and our SEC filings identify factors that could affect those results. I direct you to those documents.

And now with our prepared comments, here’s Scott.

Scott Garrett

Good morning and thanks for joining us. As we review the fourth quarter and full year 2007, please keep in mind four key factors that shaped our results.

First, revenue growth -- up 9.2% for the year and up 10.8% for the quarter. Overall, we delivered 11.9% growth in clinical diagnostics for the year, finishing with a robust increase of 12.8% in the fourth quarter.

Second, accelerating consumables growth -- immunoassay led the way all year, up more than 19%, growing at nearly three times the market rate in both the quarter and the year.

Third, winning with automation -- automation provides differentiation and opportunities for growth across all clinical diagnostics products areas. Sales of clinical automation systems were up more than 65% for both the full year and fourth quarter but, most importantly, automation drives the instrument placements which in turn drive the sales of our highly profitable consumables.

And fourth, significant expansion in earnings and cash flow. Free cash flow increased more than $100 million for the year and adjusted earnings per share were up 12.8%, exceeding our 2007 outlook. This was achieved while simultaneously funding significant R&D programs, including our next generation hematology system and our new molecular diagnostics products.

Now I’ll begin a more detailed summary of the fourth quarter and full year revenue on an as-reported basis.

For the full year, revenue was $2.76 billion, up 9.2% over 2006, or about 7% in constant currency. Revenue in the fourth quarter grew at 10.8%, trending up from third quarter. For the full year, recurring revenue grew 11.8% over prior year, reaching 78.3% of total revenue, another step up from 76.5% in 2006. This trend reflects the shift in revenue mix to more consumables and lease payments and a diminishing dependence on cash instrument sales.

The growth in recurring revenue is driven in large part by the growth in clinical diagnostics of 11.9% for the year. Diagnostics now amounts to approximately 80% of our overall revenue.

Gains in diagnostics were partially offset by a 2% decline in life science revenue, due in large part to weak demand in the academic research market.

In the fourth quarter, clinical diagnostics growth accelerated again, up 12.8%. Diagnostics momentum drove gains in consumable sales for the fourth quarter of 10.9%. The acquisition of Lumigen in the fourth quarter of 2006 contributed about 1% to this growth.

Consumables revenue for access immunoassay systems also continued to grow rapidly, up 18% in the quarter. Sales of life science products for the quarter showed modest but improved growth, up 3.7%.

Now I will summarize revenue performance by geography. In the United States, laboratories continue to focus on overall process efficiency in their operations, favoring our broad product offering, work cells, and progress automation solutions. For the full year 2007, U.S. revenue was up 7.1%, driven by double-digit growth in diagnostics.

Fourth quarter revenue in the United States was up 4.2%, led by continued strong performance in auto-chemistry, immunoassay and flow cytometry, partially offset by weak sales in hematology and life sciences products. Overall, clinical diagnostics grew 7.4% while life science declined 10.6%.

Now I will discuss international revenue in constant currency. For the full year 2007, revenue from international operations grew 6.4%, led by strong sales of clinical diagnostics products, up 9% over prior year. Europe was up 5.5%. Asia-Pacific was strong, up about 8%, led by growth of approximately 20% in China. As predicted, our business in China returned to its historic double-digit growth rates. Our new team in India also delivered excellent growth and both subsidiaries are important components of Beckman Coulter's emerging markets growth strategy.

In the fourth quarter, international revenue was up 9.5% with sales of diagnostics products and consumables growing at double-digit rates. Europe was up 5.5% on the strength of immunoassay. Asia-Pacific grew at double-digit rates, led by China up approximately 20% for the third consecutive quarter.

Excellent growth in developing economies throughout Asia was partially offset by weak market conditions in Japan. As previously stated, Japan continues to struggle with ongoing healthcare reimbursement reform and delays in research spending.

Now I’ll address revenue by global product area on an as-reported basis. For the chemistry product area, revenue for the full year 2007 was up 10.7%, driven by the continuing success of the UniCel DxC 600 and 800 autochemistry instruments. For the fourth quarter, chemistry revenue increased 12.8%, substantially above market growth rates. Placements of new autochemistry systems were especially strong in the fourth quarter, leading to a third straight record year of instrument placements.

Importantly, our chemistry immunoassay work cell, the DxC 600I, experienced strong demand in the fourth quarter. Looking forward to 2008, we should sustain our momentum in chemistry with the commercialization of our next work cell, the DxC 880I, a combination of our highest throughput chemistry instrument and the industry’s fasted immunoassay instrument, our DxI 800.

The 880I can deliver significant productivity improvement for our hospital customers and drive growth in chemistry and immunoassay. The 880I will be the first of four new work cells to be launched in 2008.

By year-end, our five combinations of chemistry and immunoassay instruments will constitute the most complete and flexible work cell lineup in the market by far. The new work cells will further enhance our leadership and reputation for bringing highly effective labor saving innovation to clinical laboratories. Our variety of new systems uniquely positions us to meet customers’ varied throughput needs at multiple price points.

In immunoassay, revenue increased 23% for the full year 2007 with double-digit growth across all major regions. Revenue from the Lumigen acquisition added approximately 4% to this growth rate. Access immunoassay consumable sales for the year grew 21.5% worldwide, accelerating beyond 2006 growth rates, which were already 2.5 times market growth.

For the fourth quarter, immunoassay revenue increased 19.2% with continued strength worldwide. Sustainability of this long-standing trend is underscored by access consumables growth of 18.2%.

The success of immunoassay was also fueled by the mid-year 2007 introduction of the mid-range DxI 600 system, building upon the steady placements of our highest throughput instrument, the DxI 800.

The DxI 600, together with the access 2 and DxI 800 provides clinical laboratories with the industry’s most complete range of immunoassay instruments. Superior clinical and economic benefits are enabled by the use of a single reagent format with comparable results across the entire line, delivering consistent information in all clinical venues and quality physicians can count on.

In the fourth quarter, we enhanced our technology portfolio with the acquisition of the remainder of NextGen Diagnostics. NextGen’s proprietary technology has the potential to revolutionize immunoassay and molecular testing by eliminating time-consuming steps, simplifying instrument design, and achieving state-of-the-art sensitivity, specificity, and quality.

In our cellular product area, revenue for the full year 2007 was up 4.3%, led by double-digit growth in hemostasis. In the fourth quarter, cellular revenue increased 5.5%, led by strength in Europe in both hematology and flow cytometry.

In December, we acquired Dako’s research flow cytometry instrument business. In combination with Beckman Coulter’s cytometry products, the new instruments provide us with a comprehensive range of research instrument solutions for our customers.

We are very enthusiastic about the additions of the industry leading, high performance cell sorter, the MoFlow, and the highly capable nine-color research flow analyzer, the Cyan, to our cytometry lineup.

Our next generation hematology system, the UniCel DxH, remains on track for a controlled launch in the second half 2008. The DxH includes improved optics and analysis algorithms, as well as enhanced automation and remote service capabilities. It is a truly new approach to hematology, providing a modular, scalable system that will meet a wide range of customer requirements for enhanced productivity in mid to large sized laboratories.

In the discovery and automation product area, revenue for the full year 2007 increased 2.6%, with sales in clinical automation up about 70% for the year. The life science tools product line was down compared with prior year.

It the fourth quarter, discovery and automation was up more than 9% with sales of centrifugation, life science automation, and clinical automation driving the growth. Sales of clinical automation products grew over 75%, demonstrating very strong momentum in automation, a central feature of our strategy for simplifying, automating, and innovating laboratory processes.

In molecular diagnostics, our DxN project remains on track. Our goal is delivery of a sample to result molecular testing system for the central lab in 2010.

As stated in December at our annual business review, we are making excellent progress. Our 2007 goal was achieved in December with the successful testing of actual samples on subsystem bread boards using DxN protocols. Simply stated -- we proved that it works.

In addition, progress continues on test development. We plan to launch with an initial list of nine infectious disease tests, including MRSA, and looking ahead we expect to add test for cancer, genetic diseases, and pharmacogenomics.

In the fourth quarter of 2007, we signed agreements with Johns Hopkins University, providing Beckman Coulter exclusive rights to intellectual property that may arise from Hopkins studies of multiple types of cancer, including breast, colon, and six others. As announced in January, we have entered into agreements with the National University of Ireland Galway to direct assay research and acquire licenses as part of the development of infectious disease tests for Beckman Coulter's molecular diagnostics instrument.

In 2008, our milestones for the molecular project include developing a fully functioning bread board instrument with assays by mid-year and producing the first prototype unit by year-end, enabling us to begin clinical trials in 2009.

Now I’ll turn the call over to Charlie Slacik, who will comment on the P&L and other financial results. Charlie.

Charles P. Slacik

Thank you, Scott and good morning, everyone. A description of the company’s full year and fourth quarter results is provided in today’s earnings release. Scott has already discussed our encouraging revenue performance for the year and the fourth quarter, but I would like to draw your attention to some addition disclosure included in our release today.

A new schedule breaks out revenue between clinical diagnostics and the life science business for the past eight quarters. Just as important, you’ll see that for the first time, we are breaking out cash instrument sales from recurring revenue. I hope you’ll find this helpful and be able to measure the different growth rates.

Importantly, recurring revenue grew almost 12% in 2007. In contrast, cash instrument sales were about flat. I think this helps demonstrate the healthy growth of our diagnostic installed base.

For the full year, gross profit was about 46.9%, down 40 basis points from 2006 levels, due primarily to a temporary increase in distribution costs caused by our U.S. ERP implementation and printed circuit board availability.

The increased distribution costs are attributable to a large number of smaller, expedited shipments needed to maintain customer service levels. These issues were resolved in the fourth quarter, so as a result, the gross margin for the fourth quarter was the same as the prior year quarter.

I’d like to point out one important metric related to the product margins and that is, clinical diagnostic product margins were essentially flat with the prior year, which we feel reflects a relatively stable pricing environment.

Now I’ll focus more closely on full-year results compared to our 2007 stated outlook. Performance measures are adjusted for the special items unless otherwise noted. The adjustments and non-GAAP measures are itemized and described in detail in today’s earnings release. I’ll start with operating expense.

Combining strong sales growth together with the savings from our one company restructuring, we delivered good leverage in SG&A. For the full year, SG&A spending was well-controlled, resulting in a 50 basis point decline as a percentage of sales.

Reported R&D included charges for in-process R&D of $35.4 million in 2007 and $27.5 million for license technology in the research phase in 2006. Excluding these items, our investment in R&D increased $20 million, growing at the same rate as revenue. This incremental R&D spend was invested in our greatest priorities, specifically our new molecular diagnostic system and our next generation hematology system, the DxH.

Full year operating income was $327 million, or 11.8% of revenue. A solid fourth quarter operating income margin of 14.5% brought our full year operating margin up to 11.8%, a bit short of our goal but closely in line with our outlook of around 12%.

Turning to taxes, the reported tax rate for the year was 28.4%, up from 26.6% in the prior year, primarily due to a shift in geographic profit mix in 2007 and a phase-out of certain manufacturing tax credits.

As you may have noticed in our earnings release today, the outlook for the 2008 tax rate is 30% to 31%, which is higher than in prior years. The higher tax rate is primarily associated with our establishing a high value development program in Ireland. This will increase the tax rate over the next couple of years but yield a lower tax rate in the long-term.

Net earnings in 2007 increased 13% over 2006, bringing full year adjusted net earnings to $208.3 million or $3.25 per fully diluted share. This exceeds our EPS outlook range of $3.15 to $3.22.

Turning to the balance sheet and cash flow, free cash flow improved $116 million to $123 million for the full year, compared to $7 million in 2006. As noted in the past, the company’s cash flow and EBITDA have been improving steadily as we complete the transition to an operating type lease business model. As OTL asset layers have been built over the last two years, depreciation and amortization have been growing at a far greater rate than OTL CapEx.

In the cash flow report for the full year, you will see that our 2007 D&A grew approximately $36 million versus 2006. During the same period, our CapEx level was essentially flat to prior year. The 2007 gap between CapEx and D&A was $72 million, which shows a marked improvement versus the gap in 2006, which was almost $107 million. We expect this trend to continue, positively impacting cash flow.

The company also strengthened its balance sheet through a $40 million reduction in debt while also improving the cash position. Our accounts receivable DSO was about flat with prior year and inventory levels were also essentially unchanged at 2.9 turns.

We repurchased approximately 537,000 shares during the quarter, bringing the total number of shares repurchased for the year to 816,000, completing the company’s previous 2.5 million share repurchase authorization. And I’m happy to report that as indicated in today’s release, our board just approved another 2.5 million share repurchase plan.

Our supply chain initiatives are continuing across many areas of the company, complemented by our focus on Lean Six Sigma. Progress in the first year was good and productivity savings from lean initiatives achieved our targets.

During 2007, Beckman Coulter completed two major initiatives which we expect will help improve efficiencies in the long run -- the consolidation of our printed circuit board manufacturing and the implementation of our U.S. ERP system. These two projects did cause some temporary disruptions to our business in the past year, which resulted in approximately $10 million to $15 million in excess costs, which are reflected in the 2007 cost of goods. As I mentioned earlier, these issues were resolved by the fourth quarter.

Ongoing efforts to consolidate operations and facilities have already allowed us to reduce our footprint by approximately 100,000 square feet. The previously announced relocation of our Palo Alto operations to Indianapolis continues on plan and on budget. Upon full implementation in 2009, this relocation is targeted to provide an annual benefit of about $7.5 million.

We also recently announced to our employees a plan to consolidated the company’s Fullerton [Ambrea] sites. We’ll begin work on this project this year and anticipate implementing the consolidation in 2009. This is yet another activity associated with our lean initiatives aimed at maximizing the productivity of both our people and our assets.

We’ll continue to share additional details of our lean program and supply chain improvements with you as we progress towards our goal of operating excellence.

And now I would like to turn it back to Scott who will provide the outlook from 2008.

Scott Garrett

Thank you, Charlie. Our 2007 results confirm the ongoing strength of our clinical diagnostics business. Double-digit growth of clinical diagnostics sales gives us confidence that future revenue gains will outpace infrastructure growth. We expect revenue growth and cost containment to generate P&L leverage, expanding operating profit and freeing up investment capacity for top priorities. Gains in recurring revenue will continue, providing a solid basis for predictable growth in revenue and earnings.

Many important financial metrics impacted by our leasing change in 2005 are now trending up. I am pleased by the progress the company’s results demonstrate for 2007 and feel confident that we have strengthened our prospects for growth over the next several years.

We have been steadily adding products and technologies to our industry-leading lineup, further enhancing an already enviable rollout of new instrument systems, work cells, automation solutions, and tests.

Turning our attention to 2008, we will continue our progress. Assuming stable currency, our outlook for full year 2008 revenue growth is 7% to 9%. Our goal for the clinical diagnostics business is to continue to exceed 10% revenue growth in 2008 and we expect revenue from life science products to be about flat.

Operating margin for the year should expand to around 12.5%, reflecting our commitment to operating excellence.

Non-operating expense is expected to be approximately $11 million to $12 million per quarter. Pretax profit growth should be between 13% and 16% and even though we expect a tax rate of 30% to 31%, earnings should be $3.50 to $3.65 per diluted share.

Capital expenditures are expected to be $290 million to $310 million and depreciation and amortization should be between $240 million and $260 million. We also expect cash flow to continue to be strong in 2008 as it was in 2007.

Our top five areas of focus in 2008 will include, number one, continuing the rapid growth of immunoassay, supported by clinical automation and the introduction of four new work cells throughout the year.

Number two, integrating our flow cytometry acquisition; number three, launching our next generation hematology analyzer, the DxH; number four, staying on pace for the 2010 launch of our sample to result molecular diagnostic system; and number five, achieving still higher levels of quality and operating excellence throughout our supply chain and business operations using lean six sigma tools.

It is clear that our core strength in clinical systems, assay development, work cell solutions and automation continues to position Beckman Coulter as a leader in the clinical diagnostics market. We are focused on creating shareholder value through growth, quality and operating excellence.

Continued investment in new technologies and emerging markets creates a pathway to sustain above market growth well into the next decade. Through our comprehensive approach to simplifying, automating, and innovating laboratory processes, we are dedicated to improving patient health and reducing the cost of care.

This concludes our comments. Charlie and I are prepared to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Quintin Lai of Robert W. Baird.

Quintin Lai - Robert W. Baird

Good morning. Congratulations on a nice quarter and a nice year. As we look out to 2008 and the guidance that you gave, could you give a little color about what your hospital colors are seeing with their funding environment? Are they having -- is liquidity good for them and the ability for you to offer things like operating type leases, does that help them shorten or keep that sales cycle in check?

Scott Garrett

We’ve not seen any significant impact from the difficulties in credit markets. In fact, most of our hospital sales, as you know, are going to the medium to large hospitals and only the smallest hospitals that we serve have had any issues at all based on the credit problem.

So we’ve not heard much at all in the way of problems due to credit and our hospital customers continue to do quite well with growing volumes of tests and a need for more automation and more productivity in their labs.

Quintin Lai - Robert W. Baird

And then, as you talked about the five initiatives at the end of your prepared comments, there was not talk of M&A. Last year you had an active M&A environment with Biosite and Dako and NextGen. Could you give us a little bit about what are your plans going forward in ’08 and ’09?

Scott Garrett

I think we’ve established a bit of a pattern and that is to look for content oriented acquisitions that we can tuck into our operations very cleanly and easily. We will continue to be on the lookout for those types of investments but certainly we’re not predicting in any given period that we’re going to do acquisitions. We’re only going to do them if they are attractive and available at the right price.

Quintin Lai - Robert W. Baird

And just a last question and I’ll jump back in the queue, Charlie, as I looked at your non-op for this quarter is just around $10 million and you are guiding to 11 to 12 on average next quarter, where is the delta coming from?

Charles P. Slacik

I think it’s just some FX. This year we actually benefited from FX a little bit which brought down the non-op from what we originally expected for the year. I think our original guidance was $10 million to $11 million per quarter and next year, we’re saying about the same, about $11 million. It’s just that this year is a little bit lower due to those FX gains and we’re not projecting those. The difference is we’re not projecting those going forward.

Quintin Lai - Robert W. Baird

Thanks. Congratulations again.

Operator

Your next question comes from the line of Jeffrey Frelick of Lazard.

Jeffrey Frelick - Lazard Capital Markets

Good morning, everyone. Scott, you had very good success with the DxC 600I, so as you roll out the DxC 880I in the first quarter for the larger labs, what percent of the labs in that marketplace would you say are penetrated now with integrated work cells?

Scott Garrett

It’s a good question. I think the larger labs have been less penetrated. Small labs were the pioneers of work cells with the early Dade Behring RXL being the initial foray into work cells. We think that the DxC 600I represents the low end for work cells, very appropriate for the smaller hospitals. The DxC 880I represents the other extreme, the high end, and then we’re going to be filling in the rest of the lineup throughout the year.

So we’ll have the appropriate price points and throughput combinations for virtually every hospital lab and it will give us a lot of flexibility in the way we position our products versus competition.

Jeffrey Frelick - Lazard Capital Markets

Okay, and just on that point, can you describe the next three additional work cells? How do you characterize them?

Scott Garrett

We literally will take our highest volume -- well, the 880I is the highest volume chemistry, highest volume immunoassay, and then we’ll combine the 600 chemistry with the 600, that’s the mid-range immunoassay analyzer, so that gives us another combination. And then we can also mix and match the mid-range immuno with the highest throughput chemistry and vice versa.

This allows us to position these analyzers as back-ups, as stat lab analyzers. They can fulfill a lot of different roles and requirements in an integrated health network and especially create advantage where we have multiple venues and one staff of doctors looking at results in immunoassay and knowing that they are getting comparable, accurate results regardless of whether it’s coming off a work cell, a standalone immunoassay analyzer, or a back-up analyzer.

When they standardize on Beckman Coulter, they’ve got comparable results because we have the exact same assay format, the exact same inventory for our customers across all these multiple instrument systems.

Jeffrey Frelick - Lazard Capital Markets

Okay, and then you’ve had good success with the DxI 600. Should that continue to drive the immunoassay consumable growth into ’08?

Scott Garrett

We think we’ll get good growth in immunoassay consumables based on the 600I, the continuing success of the 800, and all of these new work cell combinations. That gives us a lot of confidence that we can continue and maybe even continue to accelerate the immunoassay growth rates.

We’ve got a lot of advantages in our product line and as we roll out these new work cells, I think customers will be very, very impressed with what they see.

Jeffrey Frelick - Lazard Capital Markets

Okay, and just quickly, last question; expectations in ’08 for India and China?

Scott Garrett

I think it’s safe to say that we’ll continue to have above double-digit growth rates. The market estimates for growth in China and India are really just that -- just guesses and estimates. But we think that the opportunities are in the mid-teens to high-teens in both of those markets.

Jeffrey Frelick - Lazard Capital Markets

Okay, thanks. Nice job.

Operator

Your next question comes from the line of Peter Lawson of Thomas Weisel Partners.

Peter Lawson - Thomas Weisel Partners

Good morning. Thank you for the additional breakout, Charlie, for the life science business. I wonder if you can talk about the growth in that business in 4Q. Should we read anything into that or is that off of just weak comps?

Scott Garrett

It was a good improvement over earlier performance in the year but again, as we said, we’re expecting flat growth in 2008 and in constant currency, that 3.7% growth is only about three-quarters of a point.

Peter Lawson - Thomas Weisel Partners

Are there any plans for that business -- divestitures or shutting down product lines or some form of consolidation?

Scott Garrett

We are always looking for alternatives. We like our life science product portfolio. It’s very profitable. We’ve got a lot of brand loyalty and good customer appreciation for those products. But they aren’t growing as fast as diagnostics and as we look to the future, we have such compelling opportunities for investment in areas like molecular and in applying new technology to immunoassay that the life science products are not competing well for R&D dollars.

So we expect to continue to manage them for profitability, manage them for a return, and we’re always open to the possibility of a divestiture but our history and our inclination is that these products are more valuable to us than they probably are to anybody else so we expect to keep them for the long-term.

Peter Lawson - Thomas Weisel Partners

And then, on the SG&A line item, what accounted for that increase in the quarter?

Scott Garrett

Charlie.

Charles P. Slacik

Gee, you caught me there, Peter. I didn’t realize. Did it bump in Q4 versus Q3?

Peter Lawson - Thomas Weisel Partners

Just year over year growth.

Charles P. Slacik

Year over year -- if you see growth, it might just be the FX on our overseas operations, where we obviously had a strong growth in foreign currency so that would have pushed up our SG&A by about 50 basis points alone.

Peter Lawson - Thomas Weisel Partners

Okay. Thank you. And the other thing, you mentioned a stable pricing within diagnostics. I wonder if you could just talk through across the diagnostic space where you potentially see pricing?

Scott Garrett

Sure. The thing to keep in mind in pricing in diagnostics is that the installed base is very, very large and therefore, customer turnover is relatively small as a percentage of our total customers in diagnostics.

The average life of the lease is five years and the average life of an instrument is longer than that. So we’ve got a very good view of pricing across the installed base. As instruments actually come into play where we have a hotly contested integrated health network, for example, we’ve seen pricing trending down year after year. I mean, that’s kind of a fact of life and has been for 20 years in the diagnostics industry.

But overall, in any given year pricing is quite stable because this is an installed base business and there’s just not that much movement in any given year.

Peter Lawson - Thomas Weisel Partners

Thank you, Scott, that was really helpful. And then just finally, Charlie, where do you think margins can go? What are the costs that you think you can take out of the system? What should we look at -- historical margins before the lease transition?

Charles P. Slacik

Well, as you know, we’re focused on the operating margins more and more, operating income margins because we’re seeing good success in managing operating expenses and getting the leverage that comes from growing the top line at a healthy rate and really managing the operating expenses. But at the same time, I’ve got to emphasize that we are working on a lot of projects that in the long run are going to improve gross margins. It’s just that those things take a little longer to get traction to take hold, so I’d say that in the long run, we expect good improvement in gross margins but in the short-term, we expect we’re going to see more of the benefit coming at the operating margin line.

Scott Garrett

Peter, remember that some of our fastest growing regions around the world are relatively low gross profit regions but they are very good operating profit regions. The cost of SG&A in India and China is relatively low, even though the product margins are not as high as countries like Japan, Germany, France, et cetera.

Peter Lawson - Thomas Weisel Partners

Okay. Thank you so much. Thanks for taking my questions.

Operator

(Operator Instructions) Your next question comes from the line of Bill Quirk with Piper Jaffray.

Dave Clare - Piper Jaffray

It’s Dave [Clare] here for Bill. Congratulations. Just another life sciences question -- are there any geographies that you guys think are performing particularly well? And when do you think the softer regions will turn around?

Scott Garrett

Well, I think that Asia is performing well with the exception of Japan. Japan has been challenging but China, for example, is building new labs, issuing grants, and focused on creating a research capability in that country.

We are all kind of watching the election process in the U.S. and I think I’ve heard at various times candidates from both parties talk about making bigger investments in NIH and that means more grants and potentially more equipment required for the academic labs across the country.

So it will be interesting to see what happens in ’09. I don’t expect any significant up-tick in ’08.

Dave Clare - Piper Jaffray

Okay, and for molecular diagnostics, you mentioned MRSA as one of the nine infectious diseases that you are looking at. Are there any others that are obvious choices for you guys?

Scott Garrett

Well, we are looking at this initial menu as a very complete and capable infectious disease menu, so it will include viral load, it will include gonorrhea, it will include Chlamydia, and literally all the infectious disease tests that are done almost routinely now by reference labs in a molecular format.

Dave Clare - Piper Jaffray

Okay, and just one last housekeeping question here -- can you give us the CapEx spend for op leases?

Charles P. Slacik

As we’ve said in the past, it’s usually about two-thirds. But one of the things we tried to start doing, Dave, is if you look at that new schedule we added is to give a little better clarity on the installed base by showing not only the growth in the recurring revenue but the recurring revenue in terms of absolute amounts. And so I think as we go forward, that’s going to probably be the better metric to measure that installed base, particularly for diagnostics.

Dave Clare - Piper Jaffray

Okay, well --

Charles P. Slacik

It’s still in that range of our total CapEx spending though. That hasn’t moved much.

Dave Clare - Piper Jaffray

Still about two-thirds?

Charles P. Slacik

Yeah, I’d say it’s still a good measure.

Dave Clare - Piper Jaffray

Okay. Well, congratulations, guys. Thanks for taking my questions.

Operator

Your next question comes from the line of Rick Wise with Bear Stearns.

Miroslava Minkova - Bear Stearns

It’s actually Miroslava here for Rick. Congratulations on the quarter. Just a question -- if you could perhaps give us a little bit of color on what is happening with your U.S. market. It seems at least looking at growth rates that growth has been somewhat weaker. I know international has been really picked up recently, but maybe if you could give us some perspective on where you are headed in the U.S. market.

Scott Garrett

The U.S. market of course is the tale of two cities. We’ve got very good growth in clinical diagnostics and certainly some weakness in life science. So we continue to work on getting diagnostics to be a bigger and bigger part of our overall position and managing our life science product lines for return and for profit, so I think overall we’re satisfied that we’re getting good growth in diagnostics in the U.S. and we are looking to do a little bit better in life science.

Miroslava Minkova - Bear Stearns

Okay, thanks. That was helpful. And I can’t resist asking a gross margin question -- I know, Charlie, you mentioned there were a few changes this year -- the ERP system and the distribution that affected costs this year. As we have overcome these challenges, should we be thinking about gross margins maybe modestly expanding in ’08? Is that in your outlook?

Charles P. Slacik

I think what I was trying to say in the comments, Miroslava, was that we had some road bumps from changes this year, which I characterized as $10 million to $15 million, and we wouldn’t expect those problems to recur in ’08.

And so you can model it without that but we’re not making any statements at this point about improvements on gross margin just because like I was saying earlier, we’re working on a lot of projects. They take a long time to work into the P&L and so we are just a little bit more comfortable at this point giving our outlook based strictly on operating income. So you’ve just got to give us a little time to keep working on that.

Miroslava Minkova - Bear Stearns

Sure. Thank you. Thanks for the explanation and maybe finally on cellular, I know you had a backlog last quarter. Did you guys have a chance to clean this up and what kind of -- it seems like growth was about 5% and I would have thought that you maybe could benefit from Dako a little bit. If you could give us a little bit more color on the performance.

Charles P. Slacik

Sure. The acquisition of Dako closed on the last day of the year, so there was no impact at all from the acquisition. We certainly expect that the new flow cytometry products will add to our revenue growth in 2008.

Regarding the situation in hematology, we’ve stabilized and resolved all of the problems and going into ’08, the backlog is not all that different from the usual year-end backlog that we’ve seen in prior years.

Miroslava Minkova - Bear Stearns

So the $10 million from last quarter is done -- it’s gone or --

Charles P. Slacik

The backlog going into ’08 is a typical backlog.

Miroslava Minkova - Bear Stearns

Okay. Thank you very much.

Operator

Your next question comes from the line of Bruce Jackson of RBC Capital Markets.

Bruce Jackson - RBC Capital Markets

I was hoping you could just give us a little bit of color on where you expect the operating margin improvement to come from in 2008.

Scott Garrett

Well, we expect to get up to 12.5%. That’s our goal. We think we’ve got lots of opportunities to do that, most of which come from the additional volume that we’ll be driving. We’ll leverage that volume and as we continue to get revenue growth rates that are well above the growth in our SG&A and other operating expenses, that leverage will drop down to the operating margin line. So we expect that our Lean Six Sigma projects will continue to contribute and some of the issues that Charlie talked about that caused us to miss our goal in 2007 by just a little bit. We think those are resolved and we’ll not have any recurring problems of that magnitude.

So we think 12.5 is a reasonable expectation and have multiple programs in place across the company that are focused on improving that margin, so we are confident we can hit it.

Bruce Jackson - RBC Capital Markets

Okay, and then in terms of the ERP system, you mentioned that there was some implementation expenses in 2007. Are you going to have those expenses again in 2008 and do you expect to start getting some of the cost savings out of that ERP system?

Charles P. Slacik

Good question. What we were trying to explain in the script is that we turned on our ERP system in the first quarter this year and even though it’s working fine and it’s operating the company today, as with a lot of these conversions you end up with a lot of little hiccups along the way. And our hiccups were pretty much in two areas -- shipping some product, particularly overseas, caused us some delays and so as a result, we ended up doing a lot of FedEx shipping, a lot of air freight, which cost us some more money.

And the other area that impacted our business where we went through a major process change was in our field service department. A lot of people all over the world and as you can imagine, a lot of spare parts.

And so what happened in the ERP conversion, we ended up just catching up to keep our services levels high. And again, a lot of overnight air freight type of expenses in doing that. In the end, customer service turned out fine but we just had to work a little bit harder and scramble a little bit more to get product out to customers, both service parts as well as reagents.

And then lastly, as we talked about, we had our PC board problem which started in the third quarter and ran through the fourth quarter. So as a result, to keep up with the hematology requirements, we ended up scrambling on freight shipments in that area as well.

But I think as Scott pointed out, both those issues that we had in 2007 are now behind us. The operations are running quite smoothly with the ERP system running as we’d expect at this point and the hematology instruments are now coming out on a normal basis as well.

So again, I was pointing out that we incurred about $10 million or $15 million between those two problems, between variances in production and freight, which we don’t see recurring.

Bruce Jackson - RBC Capital Markets

Okay, great. Thank you.

Operator

Your next question comes from the line of David Lewis of Morgan Stanley.

David Lewis - Morgan Stanley

Just a couple of quick ones here to finish up -- immunoassay, Scott, obviously it’s been very strong on ’06 and ’07. Is it possible immunoassay can still put up an 18% to 20% number in 2008 or should we expect immunoassay to sort of steadily decline in ’08 and ’09 before it sort of rebounds on new content in 2010?

Scott Garrett

You know, I think we can sustain it and the work cells are a big part of the answer to how we do that. We’re going to win some new customers with the work cells and we are going to continue to bring out new tests that give us better utilization of what’s now a very big installed base of immunoassay analyzers.

We also have good penetration of immunoassay getting started in these high-growing emerging markets like China and India, so we’ll continue to see that growth. And even in the slower growing markets in Europe, immunoassay continues to get very good growth.

So as I look at all the contributors to our immunoassay success, I haven’t seen anything in the trends that suggest it is going to slow down.

David Lewis - Morgan Stanley

Okay, that’s very helpful. And then Charlie, real quickly on free cash flow, I think I missed a free cash flow guidance number but you gave us some components. Is it possible you could do 160, 170 in free cash flow for ’08?

Charles P. Slacik

It’s not that -- we’re not giving a free cash flow forecast but if you look at the guidance, and this is probably the best component I could give you as you think about modeling this out. The thing that’s become really apparent to us is that the free cash flow and the EBITDA is being driven not only by earnings but the growth in D&A, and these are, you know, as we talk about a lot, the OTL layers coming on and obviously what’s happened is the CapEx is ramped up to the high level with the OTL transition but right now, the D&A on those asset layers is just beginning to catch up. And so I think this year our D&A went from -- let’s see, from 2006 to this year -- went from about -- it grew about $36 million. And so that is kind of an accelerator on what I would call our cash flow and EBITDA.

And actually while I’m on that, I just wanted to come back to a question I think that Peter asked that’s relevant to this as well in terms of SG&A and the ERP system. I did forget that since we did turn the system on in the first quarter, we started the amortization of that system, which added $9 million of amortization to our SG&A expenses this year versus the prior year.

Scott Garrett

2007 versus --

Charles P. Slacik

2007 versus ’06, right.

David Lewis - Morgan Stanley

Okay, that’s helpful. And then Scott, maybe two just quick strategic questions -- the first is in life science, it seems that you are managing that business, to your own statements, for profitability and it doesn’t seem like you fee there is an opportunity to invest incremental R&D dollars. Does that also mean you are not prepared to invest incremental corporate capital dollars -- i.e., acquisition in the life science channel?

Scott Garrett

Well, our acquisition of the Dako cytometry is largely a life science research acquisition. Those are research instruments so we bought the gold standard cell sorter and also, we get good overlap into life science from Agincourt and DSL.

You know, we love to find content-based acquisitions that really help strengthen both diagnostics and life science and we’ve been pretty lucky and fortunate to get good value on three of these acquisitions over the last couple of years.

David Lewis - Morgan Stanley

Okay, and then lastly, you’ve had an aggressive market share strategy the last three years in immunoassay which has largely been very successful, almost doubling your share in that segment. And it seems as if the culprit or the focus of the company was really squarely Abbott, and to capitalize on their dislocation. Is Abbott still in the crosshairs of Beckman Coulter the next 18 months or is there a new player that goes into these crosshairs?

Scott Garrett

Well, we think that all the immunoassay market is available to us and all of our competitors have their strengths and weaknesses. We think that our strengths really do give us a big advantage.

And I can’t say enough about how important it is to have comparable results across different platforms. That drives all kinds of efficiencies and actually confidence in our customers’ approach to immunoassay. They don’t have to worry about whether the PSA is coming off a Behr or a DPC or an Abbott system. If it’s any size of work cell or immunoassay analyzer and it says Beckman Coulter on it, it’s exactly the same assay. That’s very important and it also provides economies in terms of inventory management for our customers and they can share inventory across different venues.

We think these advantages are really going to start to take hold and resonate with our customers who for many -- for various reasons have loyalty to some of these other competitors but they are really missing some additional value that’s uniquely available from us.

David Lewis - Morgan Stanley

Okay, so customers with multiple platforms beware, Scott, is that the message?

Scott Garrett

Sounds pretty good.

David Lewis - Morgan Stanley

All right. Well, thank you very much.

Operator

Your next question comes from the line of Jon Wood of Banc of America Securities.

Jon Wood - Banc of America

This is Brandon in for Jon. Did the life science results you broke out in the press release include anything from the flow cytometry business? And how big is that business today with the Dako run-rate included?

Scott Garrett

No, I don’t think we’ve provided that kind of guidance in the past. We said when we acquired the new products that they would add approximately $40 million in sales in 2008.

Jon Wood - Banc of America

Okay, and can you give us an estimate of what the consolidation of the headquarter site will add in operating savings in 2009? Or do you expect to book a gain on the sale of that land as part of the consolidation?

Charles P. Slacik

We wanted to be very clear, open, and provide a confident view for our employees so we announced very early our intention to consolidate these two sites. We are going to spend 2008 carefully planning the consolidation. We’ll implement in 2009 and a land sale would probably not take place until 2010, so we’re not going to make any predictions about what the gain might be when it’s at least two, two-and-a-half years our in the future.

Jon Wood - Banc of America

Thanks so much.

Operator

Your last question comes from the line of Tycho Peterson of JP Morgan.

Tycho Peterson - JP Morgan

Congratulations on the quarter. Thinking about maybe just along the lines of the last question about some of the cost saving initiatives, I think Charlie, in your comments you talked about lean sourcing. Can you give us a sense as to where you are on that initiative and what you think the magnitude of the potential savings could be over the next couple of years?

Charles P. Slacik

Lean sourcing, did you say, Tycho?

Tycho Peterson - JP Morgan

Yes, exactly -- I’m sorry, lower cost sourcing.

Charles P. Slacik

Lower cost -- well, right now --

Tycho Peterson - JP Morgan

Lower cost material sourcing.

Charles P. Slacik

Material sourcing?

Tycho Peterson - JP Morgan

Yes.

Charles P. Slacik

Well, we have a lot of initiatives and what we are trying to do is coordinate a lot more of the activities of the various businesses together and as you can imagine, trying to standardize sourcing materials is something that doesn’t come fast or easy and it takes even longer to flow into cost of goods in the P&L, so that’s why at this point, we are certainly happy to talk about the efforts and the projects we are working on but a little less prone to try to forecast when they are going to show up in the P&L. So we are trying to be very qualitative about the really strong efforts and the focus we have on this, but I think we’d just be a little bit more comfortable telling you, giving you the color for the efforts as opposed to trying to give you the numbers and predict when they are going to hit the P&L.

But as they get closer and we get a little bit more comfortable with them showing up, you can count on us giving you that clarity.

Tycho Peterson - JP Morgan

Okay. I assume there is not a lot of integration that needs to happen for Dako and NextGen, but can you just give us a sense as to what the actual steps are that are going to be taken here over the next six to nine months?

Scott Garrett

Sure. The first important step is to really integrate the sales force and the customer support functions in ways that they can work together on the entire product line in flow cytometry. The Dako team is very capable. They’ve got sales resources throughout the U.S., Europe, and even some in Asia, and we’re looking to integrate them into the Beckman Coulter team right away and get everybody selling the complete line of flow cytometry products.

Tycho Peterson - JP Morgan

Okay. And then finally, you had great growth in clinical automation this quarter, as you talked about. Can you give us a sense as to whether there are any kind of out-sized growth segments that you are seeing in the market? And it sounds like pricing hasn’t really been a factor there, so if you could just comment on how the competitive landscape looks these days, that would be helpful too.

Scott Garrett

In automation, as you know when we get automation we always get chemistry and more and more, we always get immuno as well. We create a partnership with the customer that leads to additional business and over the term of a -- say a five-year expected lease in automation, we’ll see excellent growth in our overall penetration of that account across all product lines.

So as we see the initial sign that we are moving into that account with automation, probably the lowest profitability transaction is the sale, if it’s a cash sale, of the automation equipment itself, followed by a long productive, profitable relationship with that customer.

So in terms of segments, the larger and the more sophisticated the hospital, the more likely they are going to go to automation sooner than later. When you get down to the mid-sized hospitals and smaller, it may be that work cells that could constitute all the automation they are ever going to need, maybe a front-end sampler handler, not necessarily connected by track would also be appropriate for a mid-range hospital.

So we are seeing penetration now throughout all the segments in the U.S. and since we launched our automate 800 front-end processor in Europe late last year, late in 2006, we had tremendous penetration in Europe with that product through ’07 and we expect it to continue in ’08.

Tycho Peterson - JP Morgan

Okay, great. Thank you very much.

Operator

Gentlemen, there are no further questions. Do you have any closing remarks?

Allan D. Harris

Yes. A replay of this call can be accessed on our website at beckmancoulter.com or streetevents.com. As for our upcoming investor relations activities in March, we will be at the Bear Stearns conference in London, the Cowen conference in Boston, and Lehman conference in Miami. Please refer to our website for more details. This concludes our call this morning. Thank you for joining us.

Operator

This concludes today’s Beckman Coulter fourth quarter 2007 year-end conference call. You may now disconnect.

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