Sigma-Aldrich Corporation (NASDAQ:SIAL) Annual Meeting of Shareholders May 7, 2013 12:00 PM ET
Barrett A. Toan - Chairman and Member of Corporate Governance Committee
George L. Miller - Senior Vice President, General Counsel and Secretary
Rakesh Sachdev - Chief Executive Officer, President and Director
Jan A. Bertsch - Chief Financial Officer, Executive Vice President and Treasurer
Barrett A. Toan
My name is Barrett Toan, Chairman of the Board of Directors, and it's my pleasure to welcome you to our Annual Meeting of Shareholders here at the Life Science and Technology Center for Sigma-Aldrich. Thank you for attending. I would like to take this opportunity to recognize our company's directors. If you would please stand when I call your name. Rebecca Bergman, Lee McCollum, Avi Nash, Steven Paul, Pedro Reinhard, Dean Spatz, Rakesh Sachdev. I wish to especially welcome Michael Marberry. He joined us this last September. Mike is the CEO of J.M. Huber specialty chemicals company and with global operations. He had experience both as a CEO and a CFO. And in the short time he's been with us, has already made significant contributions. A tenth colleague, George Church, is unable to join us today but he is here by telephone. Welcome, George.
Sigma's leadership team is here as well. I'd also like to welcome and recognize Barry Sandweiss, one of our former directors.
Now, let's get down to business. I'll call the meeting to order, in accordance with our bylaws. The Secretary will file proof of notice of this meeting with the minutes. He's informed me that we have at least 85%, more than 103 million shares, represented at the meeting in person today or by proxy. Accordingly, there is a quorum present, so we may transact the necessary business of the meeting. Tom Young, partner at KPMG, is present and available to answer questions. Brandi Williams has been appointed Inspector of Elections. Barb Branchfield and Liz Papajanas [ph have been appointed as alternative inspectors. I'll now turn the podium over to George Miller, our General Counsel, Secretary. George?
George L. Miller
Thank you, Barrett, and good morning. In our meeting today, you'll vote on the following matters: the election of 10 directors; the ratification of the appointment of KPMG as our independent registered public accountant; and the advisory vote on the compensation of our executives. Each of these matters have been fully described in our proxy statement. I now draw your attention to the rules of this meeting that can be found on the reverse side of the written agenda handed to you when you entered the room.
Shortly, our CEO, Rakesh Sachdev, and our CFO, Jan Bertsch, will be presenting to you information about our company. If you have a question, please wait until the Q&A session and then raise your hand and wait to be recognized. Once you are recognized, please first, identify yourself, your status as a shareholder and then state your comment or question.
Now, let's move on to the voting. Is there anyone in the room who has not given a proxy or voting instructions to another that wishes to vote at this meeting? Please raise your hand.
If you wish to change your vote, you may secure an additional ballot from the keepers of the ballots. Now, does anyone wish to change their vote? Good.
The election of the directors is the first item to be voted on. The slate of nominees for directors of the company was set out in the proxy materials and Barrett introduced you to each of them earlier. If there are any questions or comments, specifically related to the elections of the directors, this is the appropriate time to raise them.
The next item on the agenda is the ratification of the appointment of KPMG as the company's independent registered public accountant for 2013. The audit committee has appointed KPMG to conduct our 2013 audit and the board is seeking shareholder ratification of this action. If there are any questions related to the appointment of KPMG, this would be an appropriate time to raise it. Very good.
Now, the final item on the agenda is the advisory vote on the executive compensation. We ask that you provide your advisory approval of the compensation of our named executive officers, as disclosed in our proxy statement. This vote is advisory and not binding on the company. However, the board and the compensation committee, which is responsible for administering the company's executive compensation programs, is interested in the opinion of our shareholders. The committee will consider the outcome of this vote when making future compensation decisions for our named executive officers. If there are any questions related to this proposal, this would be an appropriate time to raise them. No questions. Great.
There are no other matters to be voted on, so the polls will now open for each of the matters I just described. I'll now turn the meeting over to Rakesh Sachdev, our President and CEO. Rakesh?
Thanks, George, and good morning to all those who came here this morning and all of those who are in the webcast. It is my pleasure to announce that at the board meeting, just prior to this meeting, the directors approved a quarterly cash dividend of $0.215 per share payable on June 15 of this year to shareholders of record on June 1, 2013.
Now, let me take a few minutes and give you a brief business overview of your company. I want to take this opportunity, again, to reiterate the mission of Sigma-Aldrich. Again, we have had a constant purpose in this company ever since we began almost 70-plus years ago and our purpose has been to enable science to improve the quality of life. And that has pretty much guided this company right throughout our journey of a successful journey over the last 70-plus years. And this where are helping our customers really have breakthrough research or produce breakthrough products around the world. And that has taken us, as you know, into being a very successful company with researchers and research labs, followed by a great entry into commercial markets where we have helped our customers on the manufacturing and development side, and then more recently, where we have made a great emphasis in the applied markets, where we are helping diagnostic companies and testing companies for what they plan to do.
Quick snapshot of 2012. Globally, it was a difficult year for many, many businesses, but I am pleased to report that, despite that, our company and our employees rose to the occasion. We ended the year, again, with record sales and record profits and record cash flow for the company. And our CFO, Jan Bertsch, will come and give you a report about how we did financially. But on the whole, it was a good year.
We ended the year about $2.6 billion in revenues. Your company remains a very diversified and a very stable company. Over -- about 60% of the sales come from outside of the U.S. So we are a very international company. We have broad end markets and that stayed in 2012. We have exposure to research labs. As I said, we are helping manufacturing and development companies, and we are also in these applied markets that I talked about which are fast-growing markets for us.
We are a very broad company in terms of our offerings. We have over 200,000 products that we take our customers and that gives us a lot of strength. In fact, there's no single product that we have today that makes up more than 1% of our sales. In fact, there's no single customer that makes up more than 2% of our sales.
If you look at the strategic priorities that we have had the company, which is we continue the progress in 2012. We have had 5 priorities. One is clearly to achieve our financial targets and achieve the commitments that we make to you as our shareholders. Improving our intimacy with our customers has been very, very key. Expanding our products and services has always been a hallmark for Sigma-Aldrich. We believe in continuous improvement and what we can do in our operations has been one of our key drivers. And probably the most important thing is, our focus on developing our enterprise on human talent. So those are the 5 things.
Jan is going to come in and talk about our progress on the financial front, while I'll give you just a very quick snapshot on how we progressed on the others. If you look on the customer intimacy front, we made a major move last year, towards the end of 2012, we really put a customer lens in this company. We reorganized the company, which we formalized, as we move into 2013, into 3 market-facing business units. So we have dedicated teams that are focused on research labs. And here, we are focused on for-profit research which takes place in pharmaceutical and biopharma companies, for non-profit research labs such as Academia and the government institutions. And we also focus on a number of our dealers around the world, who are partners of ours, who carry the Sigma-Aldrich torch into every nook and cranny of the globe where we typically cannot get into. So it's a great business for us.
Again, we put our customer lens. Our SAFC Commercial business, this is where we are helping companies who are manufacturing and developing products. Here, we have some great products in life sciences. We are into the life science services business. We made an acquisition last year that I'll talk about in a minute. And we are also now in -- not just in life sciences but we're also working with electronic -- customers who are in the electronics business.
And finally, in the applied business, where we are working with our customers in testing labs, this is different than research and manufacturing, this is where our clients are developing tests, whether it's in a clinical diagnostic phase or trying to understand environmental health. And we are working there.
Again, these markets are huge. The addressable markets that Sigma-Aldrich plays in is about $150 billion. We are only about $3 billion business, so we see considerable headroom for growth for us, as a company. Just to give you some examples, as I said, expanding products and services has been very core to Sigma-Aldrich, 2012 was no different. We launched about 3,000 new products in 2012. Again, as I said, we don't have any single product that makes up a huge piece of our business, but just to give you some examples. On the research side, we made great strides in developing a private marketplace for some of our large customers where these large customers can come to a marketplace that we have created and buy all sorts of products that they need for their research needs.
We are working with some leading institutions and we developed some great partnerships in 2012. We worked with Scripps Institute, out of the West Coast, to develop novel techniques for chemical synthesis that's going to help researchers develop new drugs. In the applied markets, we've made some great strides. And in in vitro diagnostics, we are working with companies to do sampling of the air in the workplace, of looking at isocyanates, in this particular case. We developed a pretty good business with the diagnostics company for removing abundant proteins for detecting biomarkers for prostate cancers. So we have many, many things that we did that were very exciting, working alongside with our customers.
On the commercial side, we continue to develop new products, also for pharma customers, critical raw materials that we supply. As well as we have gotten to a bigger way into the semiconductor industry where we are developing chemical precursors for the next-generation semiconductor chips, and this is going to be an exciting business going forward for us. So lots of new products. There's a lot of focus. This -- where you are sitting here, this is one of our key R&D facilities and we do a lot of work here also, for the life science customers.
Operational excellence has been always key. And 2012, some of the highlights. We made a major move to consolidate our U.S. distribution footprint in Milwaukee, so we now have Milwaukee as a master distribution center where we can ship products. We have the systems now that are that available, that we can ship products anywhere in the world from Milwaukee, which really gives us some tremendous strength to be able to do that in an automated way.
We also completed last year some major expansions in Asia. We completed our expansion in India, in Bangalore, where we have an expanded distribution center. We put a new site in China, just outside Shanghai and Wuxi, where we have packaging and distribution. And we also brought online our new precursor chemical manufacturing for the electronics industry in Taiwan, sometime late last spring.
And I think we continue to make progress in our ability to serve our customers, which we measure by our fill rates, first-time fill rates for our customers, and we continue to make good progress and that's always do very important barometer for us to see how we are serving our customers around the world.
And then finally, I think this was a great year for us to continue to develop talent in the company which is very key. None of what I just spoke about happens without good people in the company. We expanded and strengthened our senior management team. We promoted several people from within, as we moved into this new organization structure, which was fantastic. We brought in some senior leaders from the outside. You're going to hear from Jan Bertsch, who's our new CFO who joined us last year. We brought our new CIO, the Chief Information Officer, who came on board last year. We also have another individual who runs our Asia-Pacific business now who also joined us last year. So it was a great year for us continue to build talent.
It was also the first year that we launched what are calling the Executive Leadership Development Program, where we plan to bring about 25, 30 people, of our top talented people, at all levels, every year, for about 2 to 3 weeks and put them through an intense program, and we did that last year.
We are working on a number of enterprise systems to improve our ability to launch products, produce products and get them to our customers. We are working on our next-generation of our enterprise systems. We are on SAP. We went live with a global HR system for the first time in the company and the also expanded our global shared service footprint in India where we have put a lot of capabilities analytical capabilities, the ability to serve customers, the ability to increase our -- or shorten our time for launching new products. So we've got some fairly ambitious plans as we look at -- over the next few years. Just to summarize. If we think about some of the things that are -- some of the trends that are taking place in the marketplace, frankly, we some of these trends actually spilling opportunity for a company like Sigma-Aldrich. There's obviously increasing focus and human health and environmental health and that plays into the sweet spot of Sigma-Aldrich. We will continue to capitalize on that through new products and expanding our reach. Our ability to develop strategic relationships with research customers through our ability of providing a broad offering of product, offering innovation is very, very key. And I think our customers are beginning to choose to working with fewer but more strategic suppliers. And we will be one of those.
The pharma and biotech companies are now working even more on what they call small molecule, high-potent compounds that are -- which become cancer drugs. And they're also working on biological drugs for solving very complex diseases. I'm pleased to tell you that Sigma-Aldrich is well-positioned on both fronts. We are one of the few companies that has the capabilities of producing high-potent compounds, we do antibody conjugates, which are, essentially, cancer drugs. And we're also, in a big way, in helping biopharma companies in the production of biological drugs. As you know, we bought a company called BioReliance last year, which gives us the ability to do safety testing for biological drugs. We are one of the leading suppliers of cell culture media, in which these companies grow the biological drugs. So I think we're well positioned.
And we have a few other trends that, frankly, will help us. There's a growing trend on what's called translational research, or translation medicine, which is a coming together of large pharma companies and universities, because I think pharma companies are finding it difficult to do everything themselves and justify it. So they're developing a collaboration with the universities to really do some of the things that they used to do. Because of the great position that we've had in academia, that's going to help us even get some new business.
Then finally, the growth in emerging markets is going to be very key for us. It's -- Asia and Latin America continue to offer great opportunities for this company to grow.
So, have we been a good company? We are a highly valued company, as you know. 2012 was the 38th consecutive year where we grew our earnings and earnings-per-share. And I think I would attribute this to consistency. So this company has been incredibly consistent, whether it's consistency of sales growth, consistency of profitability, consistency of our returns, financial returns being more than what it costs us to get the money, consistency of dividend growth. So I think as you think about your company, think about stability and consistency that we provide, which, obviously, has resulted in a fairly significant stock-price appreciation.
Actually, somebody asked me the question the other day: "What does Sigma-Aldrich have in common with a piece of fruit and a mermaid?" And I had no clue, until I read an article in USA Today, which appeared last month, by the way, in the Financial section, which talked about companies that traded on NASDAQ, on the NASDAQ 100, to be more specific, since the tech crash of 2000. And, if some of you may have read that, it said many household names who were trading on NASDAQ in 2000, they don't exist anymore, on NASDAQ 100." And they highlighted 3 companies who have done exceptionally well. And the 3 companies, number one was Apple; number two was Sigma-Aldrich; and number 3 was Starbucks. And they had only these 3 companies. So you should feel good. So you should feel good that you're part of a company that's been very successful. But at the end of the day, it's not what we did in the last 10 years. You're going to measure us by what we'll do in the next 10 years. So stay in tune. Thanks. And now, I'll pass it over to Jan Bertsch.
Jan A. Bertsch
Thank you, Rakesh. It's my pleasure to be here again with you this year. I would like to spend just a few minutes taking you through 2012 highlights, both financial and some non-financial highlights. Rakesh has already shared with you that 2012, we had record sales, record profits and record free cash flow for the company. And also, we've realigned the company to a market-focused business unit and we've strengthened our leadership team in the company.
But on top of that, we had many awards and accolades that were bestowed upon Sigma-Aldrich last year. Let me just tell you about a couple of them. The Civic 50 Award. It's a national initiative that surveys the S&P 500 group, all the corporations, on how they engage with communities in which they serve and which they live. And specifically, they look at things like the time, the talent and the resources that companies spend in their surrounding environment. And I'm happy to say that Sigma-Aldrich scored 48th out of the top 50 of the S&P 500 group. And this is the first year that this award has been given out, so we have some room to grow yet in it. The Newsweek Green Ratings is an institution that analyzes data from the largest 500 American companies, comparing their environmental footprint and their transparency in their management to determine which companies are the most eco-friendly. And I'm happy to say that last year, Sigma-Aldrich was able to raise its score by 3 percentage points in this field.
And then the last one I'll touch on is the Carbon Disclosure Project. This project is the leading and most prestigious climate-ranking project. The CDLU ranks companies on their reporting breadth and their depth. And this year is the first year that Sigma-Aldrich has been rated and it scored a segment-leading high score of 95 out of 100 points. So we have a lot of things to be very proud of with our company.
For the full year 2012, our financial results, as I mentioned, were very strong. We've had $2.6 billion of sales which were up 5% from the prior year. Our adjusted operating income was up 3% at $673 million and our net income was up 2%. Our adjusted diluted EPS was $3.85. And this is after we experienced some pretty significant headwinds from foreign exchange movements throughout the year. So without the foreign exchange headwinds, we would have posted an EPS of $4.07 for the company.
Our organic sales growth in the company, in total, were 3% last year. And if we would look at the company, in segments, as we just reorganized into, Research grew by 1%; SAFC Commercial grew by 5%; and the Applied markets by 4%. And you can see by this, that the second half was a little bit tougher than the first half, primarily due to the economy. For research, for example, the large pharma consolidation that happened in the second quarter curtailed some of the spending throughout the balance of the year. And then in SAFC Financial, we had some pricing pressures in our Hitech segment, but that was somewhat mitigated by the very strong Life Science Products segment that we had and our cell culture media and custom pharma performance through the year.
We have a very strong balance sheet at your company. Their debt-to-capital ratio was only 21% at the end of 2012 and if we look at the end of the first quarter 2013, it now stands at 13%. Our return on invested capital continues to be very strong at 20%, and we have a very solid investment grade rating for the company. Over the past 5 years, we have generated about $2 billion of free cash flow and we've invested in that, in capital expenditures for organic growth in the company, about $550 million in mergers and acquisitions and over $1.2 billion returned to the shareholders, in forms of dividends and share repurchases.
And we continue to perform strong. The first quarter of 2013, we generated $675 million of sales. This was a quarterly high for your company. It was up 2% from last year. And our diluted EPS was $1.01, another quarterly high for Sigma-Aldrich. And our free cash flow continues to perform strong, at $129 million for the quarter.
Recently, we met with the analyst to reaffirm our guidance for 2013, and we reaffirmed our organic sales growth for this year at the low- to mid-single-digit range. Our earnings per share at the range of $4.10 to $4.20 for the year and free cash flow in excess of $430 million. So we believe we have a proven formula for value creation at Sigma-Aldrich. We've generated solid sales growth as well as solid expansion in our margins. All at the same time of keeping very strong, our return on invested capital for the company. And Rakesh had mentioned you our value creation, in terms of our total shareholder value, the appreciation and the stock price as well as the dividends. And you can see from this chart here, that we have performed very well over the last 5 years, in terms of not only our peer group but also the broader market in general. So with that, I'd like to thank you and I think we have a few moments before we move on to the agenda. If you have any questions for Rakesh or I.
Okay? Thank you.
George L. Miller
Thank you, Rakesh and Jan. We'll now close the polls. Have all the ballots been collected? Okay, the polls are closed.
Next item of business is the results of the ballot. Thank you, Brandi. Regarding the first item, election of directors, by a large majority, each of the nominees on the slate, set forth in the company's proxy materials, has been elected for a 1-year term and until their respective successors are elected and qualified.
For item number two, ratification of the appointment of KPMG. The appointment of KPMG has been ratified.
Finally, the last item, on the advisory vote on executive compensation, our shareholders have advised the company that they approve the compensation of the executive officers of the company. The inspector will furnish a written report concerning the vote count on each of these items and we will include that report for the minutes of this meeting. The company will report the results on Form 8-K to be filed with the Securities and Exchange Commission in the next days. Rakesh?
If there is no further business, I'd like a motion to adjourn this meeting. Can I get a motion? All in favor? Thank you. And thank you for coming this morning. And have a good day.
Thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.
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