Sigma-Aldrich Corp. Q1 2008 Earnings Call Transcript

Sigma-Aldrich Corp. (SIAL)

Q1 2008 Earnings Call

April 23, 2008 11:00 am ET

Executives

Kirk Richter - Treasurer and Investor Relation Contact

Jai Nagarkatti - CEO and President

Mike Hogan - CA and CFO

Analysts

Quintin Lai - Robert W. Baird

Dmitry Silversteyn - Longbow Research

Douglas Judy - KeyBanc

John Wood - Banc of America Securities

Dan Leonard - First Analysis

Derik De Bruin - UBS

John Sullivan - Leerink Swann

Presentation

Operator

Good morning. My name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the Sigma-Aldrich Corporation First Quarter 2008 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions).

I will now turn the call over to Mr. Kirk Richter, Treasurer and Investor Relation Contact. Please go ahead, sir.

Kirk Richter

Thank you. Let me also say good morning and welcome each of you to our first quarter Earnings Call. With me today, as they are for all of these quarterly calls, are Jai Nagarkatti, our CEO and President, and Mike Hogan, our Chief Administrative and Chief Financial Officer.

Following some brief introductory comments, I’ll review our first quarter performance. Mike will then comment on our sales and EPS guidance and cash flow expectations for 2008. Jai will follow that some observations on our performance and expectations. He'll also comment on the recently launched planning process for 2009 through 2011. Then following these reports, we'll open up the call for your questions and comments.

Before we begin these reviews, I do need to remind you that today's comments will include forward-looking statements about future activities and our expectations for sales, earnings 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-10K for the year-ended December 31, 2007, and in the cautionary statement in yesterday's release.

We have no plans to update these forward-looking statements after this conference. Also, SEC regulations require us to provide information on any non-GAAP financial measures covered in today's conference. That information which consists of currency and acquisition adjusted sales growth, currency adjusted process improvement savings, and profit and EPS results on both a pro forma and reported basis is also contained in yesterday's earnings release, which is posted on our website.

Now let's turn to our first quarter results. As we reported in yesterday's release, total sales of $569.6 million in Q1 are new quarterly high. And the Q1 sales growth of 14.9%, gives us confidence in our outlook for the full year that you'll hear more about from both Mike and Jai. What's behind that growth? All four of our business units contributed to this sales growth in Q1, with each of them reporting new quarterly sales high and a double-digit percentage increase in sales.

Currency was certainly a major factor, providing 7.6 percentage points of the gain, the largest OpEx contribution we've experienced since the first quarter of 2004, and well above our earlier forecast as the US dollar continued to weaken over the last two months.

But as you know, we don't control that. What we did control and are pleased by, is our 6.5% organic sales growth for the quarter. As we told you when we last reported in February, the holiday timing issue would be a factor in the first half of this year with Q1 performance impacted. What was this impact? For our four research-based units, our best estimate is that it reduced otherwise reportable growth for each of them by about one day, or 1 percentage point.

We can't provide any reasonable estimate on this for our SAFC business. We will only be able to know for sure if we are right, when we see Q2 and other results for the full first half of 2008. So stay tuned. That said, we believe that we slightly exceeded our 7% organic growth goal on a true run rate basis.

Our two core research businesses, Research Essentials and Research Specialties, again performed at better than expected levels, just as they did throughout much of 2007. And Research Biotech continued the improvement that began in the second half of last year with Q1 organic growth of 9.1%, including an added benefit from some licensing revenue from a settlement of a dispute.

Our SAFC business performed right in line with expectations, with organic growth of 8.4%. Details of the Q1 increase for each business unit were included in yesterday's release, so I’ll refer you to that release for the organic, currency and acquisition components of growth and some of the reasons for that growth by unit. But I do want to highlight just a few of the more encouraging items that give us optimism about our ability to achieve our full year 2008 sales growth expectations.

Sales to academic accounts in all geographic markets continued the pattern of increases experienced later in 2007. Even in the US, where government funding is largely consistent with prior year levels, cell culture product sales both for research use through Research Essentials and for industrial use through SAFC showed modest growth in Q1, continuing the increases experienced in 2007 for the research business and improving from the quarterly declines realized in three of the four quarters of 2007 for our SAFC business.

And many of you have asked about geographic performance with the current economic uncertainty in many markets. To-date we don’t we believe we’ve experienced any adverse economic impacts, as organic sales growth in the US and in Europe is in the mid-single digit range and organic sales to CAPLA countries collectively is up over 12%. Both largely consistent with the performance achieved for all of 2007.

Moving now to profits, we are obviously pleased with our $0.64 diluted EPS for Q1, an increase of 14.3%. Operating and pretax margins in Q1 of 2008 were 22.6% and 21.8% of sales respectively, very much inline with those reported in last year’s first quarter. The offsetting factors contributing to those margins in Q1, 2008 compared to Q1, 2007 were mentioned in yesterday's release. So I also won't repeat them today.

What's important is that the results were right in line with expectations, giving us confidence in our ability to forecast for the modest margin improvement expected for all of 2008 that you'll hear about from Mike. The tax rate increase you know, no doubt noted in yesterday's release, relates to a higher net level of international taxes and the absence of the R&D tax credit in the US.

I'll now ask Mike to comment on our 2008 sales growth and EPS expectations and cash flow. Mike.

Mike Hogan

Thanks, Kirk. As we stated in yesterday's release and as Kirk has just shared with you this morning. We fully expect you to achieve our 7% organic sales growth goal for all of 2008, with 6.5% in the first quarter and I believe that the holiday impact cost us roughly 1 percentage point. We believe we're firmly on track to achieve that 7% goal. We expect Q2 to provide a corresponding offset to Q1's recorded performance impact from the Easter holiday.

As Kirk has told you, economic conditions didn't appear to affect our performance much in Q1, and borrowing something yet unseen, they aren’t expected to have a significant impact on our business in upcoming quarters. The modest license revenue benefit in Research Biotech from a settlement in Q1 isn't expected to make a measurable contribution in the remaining quarters of 2008, although, we do expect some licensing revenue to continue through those quarters.

And finally, the small sales lift that we enjoyed from the February 2007 Epichem acquisition will be included from now on in our organic growth expectations, as we observe the first anniversary of this acquisition during the first quarter.

Quarterly results would likely vary a bit throughout the year, just as they've done in the past, due to the traditionally lumpy nature of our SAFC business and to the growing large library sales proportion in Research Biotech. That said, the continued implementation of our five strategic initiatives that includes benefits from new sales programs launched late last year and early in 2008 are expected to enable above market growth that delivers our 7% organic goal.

What are those sales programs? For Research Essentials we've bundled products with both Research Specialties and Research Biotech to make our products easier to find and to enable customers to improve their workflow. In Research Specialties, programs are focused on expanding services and on Ecommerce. New services include custom weighing, outsourcing support and customer compound management; all natural outflows of our traditional catalog business.

In Ecommerce we've added video clips to our website and now provide product referrals to complimentary items in our online catalog. These activities and many others are expected to provide organic growth of 4% for Essentials and enable Specialties to build on its whirly strings of above target growth with an anticipated increase in the 7% to 8% range for all of 2008.

Research Biotech is expected to build on its first quarter result by improving product awareness. One of the difficulties in having 450,000 stock keeping units is that the new ones get lost in the forest, and we've heard that, I didn't know you had that product line often enough that we've now developed supplemental awareness programs to exploit the opportunity to achieve 7% to 8% organic growth for Biotech in 2008.

We also expect to benefit from increased sales efforts launched late last year and during this last quarter. We are including more product information brochures in our outgoing shipments, and we’ve introduced a number of improved search tools which are tied to having scientists work rather than to alphabets or product classes on our website to facilitate product identification and acquisition by customers.

SAFC is expected to have another strong year in 2008 as well, with expected organic growth in the 8% to 9% range. Our booked orders for future delivery at 3-31-08 hit another record level. We are adding more innovative services to our supply solution offerings and we are enhancing quality systems for both our Pharma and our Biosciences customers. The potential in High Tech is even more exciting and largely untapped, with new high-brightness light-emitting diodes now appearing in back lighting for mobile phones and flat screens, and being actively considered for automotive applications.

There are many more activities that we've launched, but I hope that these examples give you somewhat of a feel for our opportunities. In making our forecast for the year, we’ve roughly doubled the expected currency benefit on reported sales forecast to about 6% for all of 2008. That assumes that FX rates remain at March 31 levels. So our 2008 reported sales could well increase by more than 13%, with additional upside potential depending on the success of our efforts to make additional strategy acquisitions, and to continue to add new technologies through partnerships, licenses and other collaborative arrangements.

These sales growth expectations and an assumption that currency rates will remain at March 31 levels, coupled with a modest contribution from the supply chain initiatives that we launched in mid-2007, and other margin improvement activities to drive pretax profit gains at a faster pace than sales, should enable us to post a small improvement on the 21.5% pretax margins we achieved in 2007.

That's the good news. But offsetting that, our effective tax rate is expected to rise from 2007 28.9% to a range of 30% to 32% this year. With higher international taxes, and the absence of the US R&D tax credit in 2008, the primary reasons for this increase. There is some indication that the US government will extend the R&D tax credit for 2008, but that hasn't occurred yet, and it has not been reflected in our earnings guidance at this time.

Finally, we expect a modest contribution to EPS from our own share repurchase activities. Considering all of these factors, we increased our diluted EPS guidance for 2008 to a new range of $2.57 to $2.67 a share, with the increase due largely to currency. This results in a diluted EPS gain for 2008 of between roughly 10% to 14% over the $2.34 reported for 2007.

We are optimistic about our opportunities in 2008, and we remain committed to delivering these results. Cash on hand declined by roughly $11 million in Q1 from last year end, as we paid down $40 million of our debt, bought back another 900,000 of our shares, and boosted our dividend by 13%. Receivable days also increased a bit, possibly due in part to the holiday affect, but we fully expect to recover that. Having day sales outstanding of 50 days is a reachable target.

For the full year we expect operations to provide $320 million to $330 million in cash. We'll continue buying our shares subject to market conditions and other considerations. Capital expenditures will increase to about a $115 million this year, up from $80 million last year, as we make larger investments in our fermentation capacity in Israel and in Asia-Pacific manufacturing hub in China.

All of that said; we believe that we have sufficient cash and sufficient borrowing capacity for both operations and acquisitions for the remainder of the year.

I'll now ask Jai to complete our review with comments on market opportunities and on our planning process. Jai.

Jai Nagarkatti

Thank you, Mike and good morning everyone. A little over two months ago, I reported on some key milestones for Sigma-Aldrich that included breaking through the 2 billion level in sales for 2007, improve profit margins, our 33 years string of annual increases from the sales and earnings, and the strong finish in our stock price for 2007 with a 40% increase last year.

But that's history. The more important and relevant question always seems to be, what have you done for me lately? I'm pleased to tell you that we have picked up right where we left off or saying it perhaps even at bit more clearly that we have continued doing those things that have made us successful in the past, adding a few and modifying a few in an effort to make sure we continue to take share in our markets, and to improve over returns which reflect in our stock price.

As we began 2008, we expected it to be another exciting and rewarding year for Sigma-Aldrich, and our first quarter performance suggest to all of us here that it has the potential to do just that. We know one quarter does not make a year, but we feel that it does provide a good indicator about what we might expect in the Life Science and High Technology markets we serve, and about our ability to deliver profit margin levels that are in line with, if not well above those or others in our industry.

With our stock prices ranging from mere 60 at quarter end, to as high as $63 million more recently, representing increases of 10% to 15% from last year’s end closing price. Our employees' spirits are high, there is a good feel about our place, and we hope you are also feeling those vibes.

You heard already from Kirk and Mike about our first quarter performance, and the activities that are expected to deliver our targeted 7% organic sales growth, and increase our diluted earnings per share by 9% to 14%, and the achievement on each of our five key initiatives that's covered in detail in yesterday’s release, so I won’t repeat any of them now.

But I will share a few additional highlights about our 2008 expectations, about general market conditions, and about what we are doing to look beyond 2008 to ensure that we continue to deliver above-market sales growth for the next three years, and the improved profit margins we expect for our 2009 to 2012.

As Mike and Kirk have indicated, we don't expect any significant adverse impact from general market conditions. In the pharma and the biotech sector, we experienced good growth in the first quarter, highlighted by strong performance in SAFC. We believe this is driven by our expanded sales force and the opportunities provided by our global presence, as pharma companies continue to outsource drug discovery and development work to contract research organization abroad.

We have also seen new small and medium sized biotech companies emerge as customers, and modest growth in sales to academic accounts in the US that began later in 2007 continued in this year's first quarter, despite less than robust government funding. The high-tech component of our SAFC business continues to gain traction and now represents 12% of that business, up 11% just one quarter ago.

We have a number of other strengths that contribute to our performance. Strong brand recognition, the broadest product line in our industry, our understanding of and compliance of an ever increasing global regulations, and a demonstrated service culture, all of which make us a trusted business partner with some of the largest players in the pharmaceutical, diagnostic, biotechnology and chemical industries, in the high-tech sector and in the academic arena.

But we have never been complacent, and we are not taking anything or granted today. We're always seeking ways to acquire new capabilities and technology, to improve our performance and to build on our leadership position and targeted areas of life and material sciences. For example to build on our leadership position in self signaling, earlier this year we launched the new prestige antibodies program. This program enables us to offer a set of highly characterized and validated antibodies through an exclusive partnership with Atlas Antibodies of Sweden.

What is unique about this program is that each antibody is a content rich reagent, with over 500 immunohistochemical images that are displayed in the publicly accessible Human Protein Atlas database. This partnership was followed closely with an announcement of our collaboration with MorphoSys to develop the next generation recombinant research antibodies using the MorphoSys's proprietary HuCAL GOLD technology.

The combination of comprehensive biological content-rich antibodies and next-generation antibody technology supports Sigma's position as the choice supplier of innovative and enabling the reagents and technologies. Our goal is to ultimately offer a highly validated and characterized antibody for every protein for the 22,000 human genes.

We are excited about this new program launched earlier this year, by listing 18,000 of these antibodies that are already attracting the interest of researchers around the world. We see the parallel between the growing interest and acceptance of the prestige antibodies program within a relatively short period, just as we saw and continue to see with a growing interest in the Zinc Finger Technology licensed last year from Sangamo.

These examples of what we call science in a bottle are expected to become the key building blocks of our horizon to growth platform in our Research Biotech unit. One significant way we keep that mindset of continues improvement here is to review our strategy and it's supporting activities on the three year cycle. Our current initiatives are expected to carry us to the end of 2008 and provide some growth beyond that. But it's time once again to develop a plan for the next three years that begin as we turn the corner into 2009.

We launched that review under my guidance, the leadership of two of our most talented executives, and a team of 10 of our highest potential employees just a few weeks ago. They will identify new activities to be added over the next three years as we attempt to maintain above market growth rates. As in the past, we expect to share those planned activities and expected outcomes in the fourth quarter, and to hit the ground running on January 2009. So stay tuned for future announcements.

A key part of our future expectations for improved service to customers and better margins for our owners is a supply chain initiative which we launched in the middle of last year. It focuses on how we procure goods and services, how we manage inventory and how we execute these and other supply chain activities with eight separate but complementary initiatives comprising the overall project.

The project should be mildly accretive to earnings for 2008, but we expect pretax benefits of $10 million to $15 million as early as 2009 increasing somewhat ratably to between $35 million and $45 million by 2012. That could increase our otherwise reportable diluted earnings per share by up to $0.24 in 2012, assuming our diluted share counts remains at today’s level of roughly 132 million shares.

Let me sum up by saying that we believe 2008 is a year chockfull of opportunities. We know what they are, we fully intend to exploit them, and desired research is follow: the 7% organic sales growth and earnings per share of $2.57 to $2.67. And we are committed to continuing our market leading performance well beyond this year.

I want to thank you for your ongoing interest in our company, it remains strong. We have scientific knowledge and service that's second to none, a talented and committed group of co-worker, a loyal customer base, and an enviable strong financial position. We remain very optimistic about our future. On behalf of Kirk, Mike and all our colleagues around the world, I want to 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 Instruction). And your first question will come from the line of Quintin Lai with Robert W. Baird.

Quintin Lai - Robert W. Baird

Good morning, congratulations on a nice quarter.

Kirk Richter

Thanks Quintin.

Mike Hogan

Thanks Quintin.

Quintin Lai - Robert W. Baird

At your Analyst Day, I think there were some comments on pricing increases at the start of the year with the new catalog. Could you provide some color on what pricing did to organic revenue growth for the quarter and what are your expectations for the full year?

Kirk Richter

This is Kirk, Quintin. I think, we're still seeing research price increases in the 2% range, that's on a net basis and that's largely consistent with what we saw last year. So that's what we saw in the first quarter and expect for the full year.

Quintin Lai - Robert W. Baird

And then with respect to the revised FX guidance, how does that impact the operating margin? Because I thought that you are predominantly US manufacturing and so as the FX tailwind gets stronger does it now contribute more to the operating margin?

Kirk Richter

That does help the operating margin a little bit more than it potentially helps the sales line, that's correct.

Quintin Lai - Robert W. Baird

But then on the offsetting side because it's coming from for example Europe, does that mean that the tax rate we should be thinking at the upper end of the 30 to 32 with that bigger tailwind.

Kirk Richter

I don't think that necessarily carries true to the tax rate. What we are seeing there is a just lower net level of international tax benefits and the lack of the R&D credit in the US.

Quintin Lai - Robert W. Baird

And then finally with the nice performance in Biotech, could you remind us again what's the impact of licensing? And then with all the new initiatives especially the products that Jai mentioned in his comments, what do you expect in terms of how long will it take for some of these new products to gain traction in the market?

Jai Nagarkatti

Quintin this is Jai. I think the product line that I mentioned is the prestige antibodies that we launched, and that's been about three months since we launched that and we are very encouraged that I think the reception from our customers to the product line which is so content rich, it has been so positive that we will continue to add more of these antibodies over the course of the year, again with our final goal of wanting one antibody for every one of the proteins for the 22,000 human genes. So I think that’s very positive development, and we are continuing to look forward to that contributing.

The licensing issue that you talked about. As you know we continue to go out and license the technologies that we have. In the first quarter we had customer license batch [ph], and I think the settlement of the dispute that we had did contribute to that license and on an ongoing basis we will continue to sell more licenses.

Quintin Lai - Robert W. Baird

Thanks, congratulations guys.

Operator

Your next question will come from the line of Dmitry Silversteyn with Longbow Research.

Dmitry Silversteyn - Longbow Research

Good morning gentlemen or good afternoon, I guess still morning. Congratulations on a solid quarter. Good way to start the year. Just a couple of questions on the Research side of the business. You talked about conditions improving slightly I guess even versus what you saw at the end of last year. Year-over-year growth however, when you look at organic growth it's kind of slowdown from what you did in the second half of 2007. So, is there a question of coming up against tougher comps or do you expect the growth to kind of reaccelerate towards the top end of your revised guidance as the year unfolds, and more will be driving that growth, I understand the biotech portion but what about the essentials and specialties?

Kirk Richter

I think if we look at essentials and specialties, our guidance for the full year is very much in line with what we achieved last year. We certainly saw the Easter impact, but as we said in our comments, if you take that out we would say we're on track. Now obviously, we can't prove that until we get the first half results, but our expectation is we're going to hit our goals of roughly 4% and essential in the 7% to 8% in specialties.

Dmitry Silversteyn - Longbow Research

Okay, Kirk. Thanks a lot. That's right, the 1% are so, is offline offset from the Eastern holiday. You mentioned possibility of M&A activity in 2008 perhaps contributing further to your earnings growth. Can you give us some update of kind of where you are in your M&A process as far as at least which areas you're looking at to build out with M&A and kind of the size of the deals that you are looking at as well as the overall environment given the credit crunch, are the multiple is getting more reasonable or are you still competing against some people that have cheap money out there?

Mike Hogan

So this is Mike. So the Dmitry you haven't seen any announcements from us which tells you we haven't close the deals on anything. Activity levels are about the way they were in the second half of last year. We've looked at a number of things and the fact that we haven't announced anything says that, they didn't meet our criteria. We continue to look in high-tech and we continue to look in the various areas of the life science that we shared during the Analyst Day, Investor Day and I don't know, we've seen half a dozen or so things in the first quarter, but none of them met our expectations at a price we were willing to take.

As there has been opportunistically over the past few years, there is opportunities in the specialties area for reagent to help support Dave Julien's business. As you know, those tend to be relatively small. They tend to be kind of mom and pop, much smaller operations, exercise. We've seen things that were tiny and we've seen things that were sizeable enough that they might actually have been a unit of our own company, and we continue to remain open to all of those things.

Dmitry Silversteyn - Longbow Research

Okay and then final question. Given your very strong cash flow and the fact that your net debt is now below $300 million probably as the stronger balance sheet as you had Mike since you've kind of launched the initial share repurchase program right way back I guess five to seven years ago now. Buying back shares here basically doing it enough to offset the dilution; it doesn't look like you are paying down debt to any significant level here.

What's the use of cash. I mean as the cash balance continues to build and probably in a year, year and a half you are going to be basically debt free at least on net basis. Are there enough investment opportunities, whether you are talking about acquisitions or internal for you to use those cash or is there some consideration for returning it to the shareholders in some other way?

Mike Hogan

So we've I have been a pretty good in relative terms to other companies about returning cash to shareholders, and we bought back almost 40% of the company. We placed our dividend pretty handily over the last few years. But that out, out of the way, we believe there will be plenty of opportunities to productively redeploy cash continuing to buy shares back at about the same pace we are at today.

Dmitry Silversteyn - Longbow Research

Okay so basically offsetting dilution. And you are not looking at raising your dividend towards a little bit more than a 1% yield here?

Mike Hogan

No Dmitry all the work that we've done and all the work that we've receive from third parties that help us think through those issues indicate that companies in our growth range in terms of opportunities kind of 10 at the top and a little more than 10 at the bottom which is what we say we will do have about a 1% yield, and that we would be unusual if we had a significantly higher win or a significantly lower one win and so it's being our intent to have that remain at above the 1% yield level.

Dmitry Silversteyn - Longbow Research

Got you. Thank you, Mike.

Mike Hogan

You bet.

Operator

Your next question will come from the line of [Douglas Judy] with KeyBanc.

Douglas Judy - KeyBanc

Good morning.

Kirk Richter

Good morning, Doug.

Douglas Judy - KeyBanc

Your comments on the growth prospects for the high-tech business sounded fairly promising, however lately we've been seeing few of the electronic materials players reduced their outlooks for 2008, any concerns here and the demand aspect may be coming down a bit?

Jai Nagarkatti

This is Jai. I think what we see is the area that we play in is still in the front end in the development and small projects. We do not see any let down in that in terms of the number of projects that we are getting inquiries for and the new innovative R&D work that we are doing for people for the next generation semiconductor or flat panel application and so on. So we are fairly bullish on that.

Douglas Judy - KeyBanc

Okay. But is the economic cyclicality of this piece of the business, certainly I would think that would be lot bigger than your base business?

Jai Nagarkatti

I think again, this is such a small piece of our portal business that it will not have that big of an impact.

Douglas Judy - KeyBanc

Okay. And just one final question. On the product bundling across the research lines, does that have a larger effect on any of your specific segments or is it pretty much broad based across as far as driving your business growth?

Mike Hogan

We hope it benefit all of them frankly. What we have done is put natural product classes together. So if you use A with B, we’ve made it easier for you to wear A and B on together. Because of the characteristics of products and how they are located in various units for the mode of how they sell, we think this is going to have positive impacts on all three of the research units.

Douglas Judy - KeyBanc

Alright. Thank you very much.

Operator

Your next question will come from the line of John Wood with Banc of America Securities.

John Wood - Banc of America Securities

Okay, thanks a lot. Mike CapEx looks to be ticking up a little bit as a percent of sales in 2008. First is currency impact that number at all and then secondly, do you expect that level of relative commitment to continue?

Mike Hogan

So two your answers. Partly because of where we are spending the money currency does have a bit of an impact. I mean the vast majority of that span for new big projects is in places like China and Israel, those are not small projects John. Those two between them, over that, in the next couple of years is roughly $100 million more or less. So it's not all in this year, and some of it started last year, but just to give you an idea of relative scale. The 115s are a little high, frankly the 80 last year was little low based on the size of our business. We would expect, kind of a 90 to 105 to be a normal run rate over the next several years.

John Wood - Banc of America Securities

Okay. Will you disclose the size of the settlement in Biotech or cannot do that?

Mike Hogan

By legal agreement, we cannot and will not do that, but we can assure you, it's not material, it's a raw material. Our auditors would have insisted that we disclose it no matter what, and so it's not a material number in the size of Sigma-Aldrich. But the evidence of that will come in what Biotech does in the next several quarters. So you'll see just how easily it was absorbed in the run rate.

John Wood - Banc of America Securities

Okay. And then only industrial cell culture business, the main competitor out there saw a huge up tick in margins on lower share repurchasing cost, did you see that?

Jai Nagarkatti

I think what we have seen in the sera business is that the demand is really in balance with the supply, the pricing we see is fairly stable, and like everybody else we are looking at opportunistic sales to service demand and the margins we have not seen anything significantly different.

John Wood - Banc of America Securities

Okay. So you're saying the pricing like to your customers is stable and you're buying cost have been unchanged?

Kirk Richter

Correct.

John Wood - Banc of America Securities

And you did have an improvement in that business in the quarter. Was it sera versus media, was it broad based? Any additional commentary would be helpful?

Jai Nagarkatti

I think its broad based, I think again this also is a lumpy business as people come up and ask for a match ups media we make it. So it was not specifically serum or media, it's a combination

John Wood - Banc of America Securities

Okay. Thanks a lot.

Operator

Your next question will come from the line of Dan Leonard with First Analysis.

Dan Leonard - First Analysis

Hi good morning.

Kirk Richter

Good morning, Dan.

Dan Leonard - First Analysis

My first question is a bit of a follow-up to Quintin's from earlier. You mentioned that you are doubling your forecast for expected currency benefit in 2008, yet your commentary on your pretax margin expectations is relatively unchanged from your prior press release. Could you help me appreciate what headwind is there to your margin improvement?

Mike Hogan

So you don't get a tremendous benefit on margin improvement from currency alone because you have growth in your cost structure outside the United States as well, and as our business moves disproportionately grows in Europe and Asian and Latin American markets compared to the United States. You don't gain as much ground. We've got all kinds of thing going on in the company as you can all imagine Dan. We are prepping to deliver tremendous savings from our supply chain activities over a five year period. And as we've said that will be mildly accretive for the whole year.

We are taking some lumps as we implement some of those things to shutdown small facilities and streamline our processes, and rather than moaning and groaning about them, we are just eating them as we go. It's kind of like stopping at McDonald's every 10 miles. So there is a lot of things going on in the business that are just natural, there are kinds of things that we are absorbing and currency is being helpful in letting us to do that

Dan Leonard - First Analysis

Is there any quantification you could give me about all the headwind that all those absorptions are causing right now on margins?

Kirk Richter

Yeah, I mean it’s not material. We still pretty good about 21.5% margins. I think that we just came out as Forbes most profitable company in our industry again this year.

Dan Leonard - First Analysis

And how of the drag is the Epichem business on your operating performance?

Mike Hogan

Epichem has fine margins. They are actually doing quite well, they are exceeding expectations from when we acquired them. As Jai mentioned that segment has grown 1 full percentage point and the size it represents within SAFC, and that’s because we are in some really interesting and compelling early stage research projects with some of the largest customers in that field.

Dan Leonard - First Analysis

I thought you gave Epichem as a reason for margin head wind in the press release?

Kirk Richter

It had been a strain last year. It had been a strain last year in its first year but that’s starting to abate a bit. I mean, some of the first year charges you have when you bring in acquisition for marking inventories up, for example, go away after you get through your first year.

Dan Leonard - First Analysis

Okay. Thanks. And then, finally question, can you share with me what percentage of your business is from China, India and Brazil, I guess with hyper growth geographies?

Kirk Richter

I think like we shared you Dan, before I think today I think CAPLA markets represents little over 20% of our total business, a significant piece of that is Japan and you can say the most of the rest would be the high growth markets of China and India.

Dan Leonard - First Analysis

Okay. I would just like to back out the Canada and Japan from CAPLA to try to get out what the high growth exposure is?

Jai Nagarkatti

Yeah, it will be about between 10% and 15%

Dan Leonard - First Analysis

Okay, thank you.

Operator

Your next question will come from the line Derik De Bruin with UBS

Derik De Bruin - UBS

Hi, good morning.

Kirk Richter

Good morning, Derik.

Mike Hogan

Good morning, Derik.

Derik De Bruin - UBS

So, biotech began to pick up a bit. And what I'm curious about is, if you could give me some color in terms of how's the biotech sales breakdown in North America, Europe and ex-US. What I'm roughly trying to get out is the market opportunity for molecular biology, biotech products in the emerging markets. That's again like a real fertile area?

Jai Nagarkatti

Derik, as we shared with you, our biotech unit really comprises of four sub-segments, molecular biology, cell signaling, protein extraction and purification, and then you have the oligo business. Now if you look at all of these business sub-segments, the growth opportunities for the molecular biology, we see strong growth both in the US and Europe.

We see that in the CAPLA markets, research has not gotten so entrenched in molecular biology that we still don't see opportunities yet there, but longer term we see a lot of promise. In terms of an oligo business, I see that there is more growth that we're seeing even though the overall market is stable for us. We are seeing faster growth in countries outside the US, and the rest of the business is fairly well spread, self signaling that we are the global leaders and we see growth in all parts of the world.

Derik De Bruin - UBS

Okay, great. That's actually helpful. The industrial cell culture business began to pick up a bit. I guess when you look at the pipeline over the next couple of years, I know you can't give specific details, but I mean, are there things that you see that are in development that are in your customers pipelines right now, that gets really excited, there is going to be significant increase in demand for bio-manufacturing capacity and cell culture media? I just want to get your feel for where you see that market going?

Jai Nagarkatti

Derek I think obviously I think we are still in very positive about the whole market when we made that acquisition of JRH. Because as more and more life science companies look at making biopharmaceuticals, cell culture media is a significant component and the thing that we do is try to get in early the development projects that the focus we try to get as many of that realize that the patient rate is also very high here and that's a good exciting projects that our customers had involved and then we want to be part of it.

Derik De Bruin - UBS

Okay. And then one final question, so this one's come up frequently from client of late. In 2007 you had 14% EPS growth, but excluding currencies it was about 2%. And I guess if as the US dollar shifts, what's the organic EPS growth potential of the business, as you kind of look longer term, assuming that we are in kind of a not mutual dollar environment. I think that's seems to be probably the number one question getting from clients right now.

Jai Nagarkatti

Derek this is Jai. I think let me answer that question in two parts. One of them is I think obviously our EPS growth, our target is to grow at the same level or faster than our sales growth. Having said that, probably the question on everybody's mind which is unasked is that EPS growth in this quarter is not growing at 6.5% of sales.

While we are pleased with the overall growth, there are factors that we have touched on, one is obviously the higher tax rate and the second is conscious investments that we have made in decisions as we implement our supply chain that we have taken some cost. Now if you want - at this point I'd like Mike to walk you through that process to show that our EPS actually has grown notwithstanding what you have seen in the release.

Mike Hogan

If you pull out the currency and you were to grow organic EPS at the 6.5% rate, the EPS would have gone up about $0.04 in the first quarter. We were starting at $0.54 last year. Of the $0.04, $0.02 of that was tax as we disclosed in the release and that is what it is. We are all hopeful that the US Congress acts appropriately and a few other things, but I mean it is what it is. And the other $0.02 we’re talking $4 million pretax.

These facilities we closed aren’t free and there are other things that pop up in the business from time-to-time that you just take care of as I said earlier. So I mean $4 million of pretax in a company that's going to do well over $2 billion in sales is a pretty small quarterly fluctuation. So, we believe that we can grow EPS and sales at roughly the same rates with slight leverage on the EPS line both on a reported basis and on a currency adjusted basis over the long-term.

Derik De Bruin - UBS

Great. Thank you very much.

Operator

(Operator Instructions). Your next question is from the line of John Sullivan with Leerink Swann.

John Sullivan - Leerink Swann

Hi, guys good morning.

Kirk Richter

Good morning, John

Mike Hogan

Good morning, John.

John Sullivan - Leerink Swann

Couple of quick ones. First of all, in Japan you guys talked in the analyst meeting about a little bit of different go-to-market approach, I’m just wondering how that’s going and do you have any update for us in your business in Japan?

Jai Nagarkatti

John, this is Jai. I've couple of comments. I think we are very encouraged with what we are seeing in Japan. Obviously, we shared with few at the Analyst Day our approach and suffice to say that it’s working as we anticipated and I don’t want to make more comments on that for obviously reasons.

John Sullivan - Leerink Swann

Okay. Would you have a comment on the Japan market in general or not?

Jai Nagarkatti

Japan market is I think is coming -- is coming back from the dead that it was several years ago and that's encouraging.

John Sullivan - Leerink Swann

Okay, great. And just switching gears a broader question; you guys do a good job of creating efficient distribution channels to research labs. I am just wondering do have any plan to extend forward into clinical labs, into hospital labs? Do you think that that's appropriate to your business and do you see that as an opportunity in the long term?

Jai Nagarkatti

Now I think again our strategy always has been to align our resources and leverage our scientific knowledge to enable our customers. We generally try to stay away from getting into markets that compete with our customers.

John Sullivan - Leerink Swann

Okay. Very helpful thanks.

Operator

And at this time everyone there are no further questions.

Mike Hogan

Okay. So we will certainly thank you for your participation today. Looking forward we do expect to release results for the second quarter of 2008 on July the 22nd and our next conference call is scheduled for July the 23rd again at 10'o clock Central time. This concludes today's conference.

Operator

Ladies and gentlemen thank you for joining today's call. You may now disconnect.

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