Ron Hutton - Vice President and Treasurer Christine Tsingos - Chief Financial Officer, Executive Vice President Bradford Crutchfield - Executive Vice President, President, Life Science Group Norman Schwartz - Chairman of the Board, President, Chief Executive Officer John Goetz - Executive Vice President, President, Clinical Diagnostics Group.

Brandon Couillard - Jefferies Jeffrey Matthews - RAM Partners.

Good day, ladies and gentlemen, and welcome to the first quarter 2014 Bio-Rad Laboratories earnings conference call. My name is Britney and I will be the operator for today. At this time, all participants are on a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. And at this time, I would now like to turn the presentation over to your host for today, Ron Hutton. Please proceed, sir..

Thank you very much, Britney. Before we begin the call, I would like to caution everyone that we will be making forward-looking statements about management's goals, plans and expectations.

Because our actual results may differ materially from these plans and expectations, I encourage you to review our filings with the SEC where we discuss in detail the risk factors in our business. The company does not intend to update any forward-looking statements made during the call today.

With that, I would like to turn the call over to Christine Tsingos, Executive Vice President and Chief Financial Officer..

Thanks, Ron. Good afternoon, everyone, and thank you for joining us. Net sales for the first quarter of 2014 were $509.3 million, an increase of 1.9% on a reported basis versus the same period last year sales of $499.7 million. On a currency-neutral basis, sales increased 2.9%.

During the quarter, we had good growth across many of our key markets and product areas in our Life Science segment as well as certain diagnostic products.

Sales growth in the quarter was partially offset by continued weakness in the European diagnostics market, which posted a decline in currency-neutral sales versus last year as well as continued challenges in North American research market, which was essentially flat versus last year.

Offsetting these tepid regions was solid growth in the emerging markets, most notably China and Latin America. The reported gross margin for the first quarter was 54% compared to 54.3% last year and 53.6% in the fourth quarter of 2013.

This margin is reflective of continued pricing pressure in our diagnostic business offset somewhat by a decline in royalty expense in our Life Science segment. Total purchase accounting and amortization expense related to acquisitions recorded in cost of goods sold was $8.3 million compared to $8 million in the first quarter of last year.

SG&A expenses for the first quarter were higher than expected at $202.3 million or 39.7% of sales compared to $185.9 million or 37.2% of sales last year. As expected, absolute spending is up year-over-year, primarily related to increased IT expenses, as well as increased personnel costs typically associated with our first quarter.

In addition, during the quarter we recorded an incremental accrual of $9.8 million related to our ongoing efforts to resolve the previously disclosed investigation related to the Foreign Corrupt Practices Act. Total amortization of intangibles related to acquisitions reported in SG&A for the quarter was $2.1 million.

Research and development expense in Q1 was in line with expectations at 10.3% of sales or $52.5 million, which compares to $50.3 million spent in the first quarter of last year. The increase in R&D expenses is primarily for investment in cell biology and Digital PCR products, as well as new instrumentation for the diagnostic market.

With a sizable sequential decrease in sales from the fourth quarter of more than $93 million, combined with a fairly flat gross margin and a high level of both fixed and one-time operating expenses, the operating margin for the first quarter was in turn significantly impacted and resulted in a 4% operating margin compared to 7% in the year ago period.

Excluding the FCPA related accrual, the operating margin for the quarter was approximately 6%. During the quarter, interest and other income was a net expense of $5.9 million compared to $11.1 million of expense in Q1 of last year.

This decrease versus last year is largely related to lower interest expense resulting from our bond redemption in the third quarter of 2013. The effective tax rate used during the first quarter was somewhat meaningless at 54%, primarily due to the low pretax income discrete items and the expiration of the U.S. Federal R&D tax credit.

Given this high first quarter rate and excluding any discrete items that may occur during the year, we now expect the full year effective tax rate to be in the 34% to 35% range. Net income for the first quarter was $6.7 million and diluted earnings per share were $0.23. And now for certain segment information.

Life Science reported sales in the first quarter increased to $161.5 million, a growth of 3.3% on a reported basis. On a currency-neutral basis, sales grew an impressive 4.6% when compared to last year. This growth was driven by continued strong demand for our Droplet Digital PCR instruments and reagents as well as the new NGC chromatography system.

Our food pathogen and process media businesses also increased double-digit during the quarter. On a geographic basis, Life Science sales were particularly strong in Europe, China and Latin America. This growth was partially offset by continued slowness in the U.S. academic research market, as well as the government austerity program in Japan.

In terms of profitability, the Life Science gross margin improved more than 150 basis points compared to last year, the result of a shift in product mix towards higher margin instruments and consumables as well as a decrease in royalty expense.

Sales in Clinical Diagnostic products were $344.3 million compared to $340 million last year, an increase of 1.3%. On a currency-neutral basis, year-over-year sales grew 2.1% for the Diagnostics group.

This lower overall growth is reflective of continued competitive and pricing pressures, especially in Europe, as well as a tough to compare with 2013 where the first quarter included a significant sale of diabetes monitoring instruments in China.

On a geographic basis, Diagnostic sales in the emerging markets of Asia-Pacific, Eastern Europe and Latin America were strong in Q1, partially offset by flat to down market in the U.S. and Western Europe.

As you may now, we recently announced the acquisition of GnuBIO, an exciting new droplet-based technology for targeted sequencing in the Clinical Diagnostics market. GnuBIO has developed an innovative desktop platform that incorporates all of the functions of DNA sequencing into a single, integrated workflow.

This new technology will leverage the tremendous knowledgebase we are growing in Droplet Digital PCR. While it will likely take a few years to bring this product to market, we are excited about the prospects for this potentially game changing technology.

Terms of the acquisition include a payment of $40 million at the April 10 closing date, as well as contingent consideration for a potential incremental $70 million related to several development and sales milestones over the next three years. Moving to the balance sheet. As of March 31, total cash and short-term investments were $641.3 million.

Despite the lower income in the first quarter, net cash generated from operations was substantial at $69 million compared to $24 million in the year ago period. This increase in cash flow is primarily the result of improved customer collections, lower interest payment and lower taxes paid.

Net capital expenditures for the quarter were in line with our expectations at $25.8 million. Our full-year expectation for CapEx remains in the $142 million to $150 million range as we continue to invest in a global ERP system. And finally, depreciation and amortization for the quarter was $36.7 million.

On our last earnings call, we laid out guidance for 2014, that is for currency-neutral organic top line growth of around 2.5%, full-year gross margins in the 55% range and an operating margin of 9%, which reflects our continued investments in new technologies and systems.

Despite the relatively slow profitability start to the year, we are maintaining the base business guidance given at the beginning of the year. To this base guidance, we must now include the impact of our acquisition of GnuBIO. For the next several quarters, we will be investing heavily to bring this exciting new technology for the diagnostic market.

As such, we estimate an incremental spend in research and development of approximately $5 million per quarter, which will be recorded in our Clinical Diagnostic segment. With the inclusion of GnuBIO in mind, we now estimate the 2014 full-year operating margin to be somewhat lower in the 8% range. And now we are happy to take your questions..

(Operator Instructions). Your first question comes from the line of Brandon Couillard with Jefferies. Please proceed, Brandon..

Hi. Good afternoon..

Hi, Brandon..

Christine, are you able to quantify the impact or the incremental impact the ERP investments on the P&L in the first quarter?.

I can. So incremental, I assume, versus last year at this time, and what increase versus last year at this time is taking on the depreciation as well as the other support cost of the deployment that went live in April 2013 and that increment is about $3 million.

In terms of the ERP project spend, it's flattish year-over-year and remember last year at this time, it was right before we were going live. I think that as the year goes on, you will see that increase in ERP spend year-over-year start to materialize..

Okay, I am not sure if Brad is there, but if he is, could you elaborate on the GnuBIO deal.

What appeals to you about the system and sort of whatever commercialization timeline you are willing to offer at this point?.

Okay. Yes, Brandon, I am here. Well, clearly the technology of GnuBIO fits very, very well with the technology that we got from QuantaLife and we commercialized PCR.

Essentially, we have now, I wouldn't say we cornered the market, but we have a tremendous amount of capability in Droplet and the capability around GnuBIO is the ability to inject into droplets, the so called pico-injector. What that really allows us to do is a lot more flexibility and a lot more multiplexing.

Specifically it's going to allow us to barcode droplets and then very, very specifically interrogate gene and sequence across very specific genes, certainly in numbers that are not anywhere near a discovery platform, but certainly in a targeted approach around, I would say, we are going to answer questions that have meaningful answers and will ultimately results in changes in treatment, of course.

So that's what is driving this. It's a technology that's been proven. It's using a standard hybridization chemistry versus single base sequencing and so the great upside for us is just, we will integrate this into a single workflow where you start with genomic DNA and you get an answer. So we are very excited about it.

There is a lot of work to do to get that cartridge bulletproof and then, obviously, the regulatory parts of that as well. Certainly something we wish to do within two years..

Super, and then one for Norman, I guess a two-part question. Could you give us an update on the progress you have made around the facility consolidation efforts that are planned for the year? And then an updated view around the M&A pipeline would be helpful..

Okay. Well, in terms of facility consolidation, I assume you mean really manufacturing operations..

Okay..

Actually we are working on that. we have completed one piece of that puzzle and there are a few further rationalization planned, as I think we talked about before, especially in Europe manufacturing. Also doing some work around streamlining our logistics footprint and we are continuing along that process. In terms of the M&A pipeline.

Obviously, we just completed this GnuBIO acquisition. That will keep us busy for a little while. There always is few things in the pipeline but nothing I would say significant at the moment..

All right. Super. Thank you..

There are no further questions at this time..

You want to poll just one more time, just in case?.

Okay. (Operator Instructions). We have a follow-up question from Brandon Couillard with Jefferies. Please proceed..

Excellent, I will keep going.

Christine, was there any impact of weather in the U.S.? Either in the Diagnostics business or in Life Sciences that you can put some numbers around?.

We certainly can't --.

Most likely. I think it's hard to quantify..

Yes. It's really hard to put numbers around it. Obviously there was bad weather in the first part of the year in the U.S. Probably the government was shutdown for a few days. What the total effect was, we really haven't quantified..

Okay, and any update around the blood typing submission to the FDA?.

This is John, Brandon. No. we haven't had really any feedback yet. That just went in, in February. So we should expect to hear something probably in the coming months now..

Okay, but it's been submitted, though, at this point..

Yes..

Okay, super, and then Christine, could you give us the total amortization expense in the first quarter?.

Deal related or total, total amortization?.

Total..

Because when we talked about deal related and the $8.3 million in cost of goods and $2.1 million in SG&A that are related to prior acquisition and then you want me to break it out. I am looking through my cash flow statement.

Amortization from depreciation, because I did mention in the script that the total depreciation and amortization was $36.7 million for the quarter. Okay, so it breaks out $25 million is depreciation and amortization is about $12 million..

Okay. That's helpful, and then in the Diagnostics business, maybe this is just one for John. How would you characterize the environment in Europe? Are the pricing pressures and competitive headwinds intensifying? And if you could give us a sense of the growth rate of the business outside of Europe would be helpful..

Well, to your first question, Brandon, the length of tenders has had a pretty significant impact on pricing pressure, as few companies don't want to lose an opportunity where the business is being held up for three, four, five, six, seven years. We have even seen some tenders as long as 10, which is quite amazing.

And I think I mentioned in the last call that the part of the business that seems most impacted by all of this is in our blood virus testing business where we really have suffered some setbacks there, which is really overall, (inaudible) our overall picture in Europe.

Outside of Europe, and I think Christine has mentioned the emerging market growth has been really pretty good for us and thank God for that..

Yes, I think I will say that the developed world, North America, Western Europe, Japan, the growth is high single-digits..

Super. Thank you..

And your next question comes from Jeffrey Matthews with RAM Partners. Please proceed, sir..

Hi. Thanks very much.

Can you hear me?.

Hi, Jeff..

Hi.

In baseball terms, what inning do you think you are in, in the European consolidation?.

In the European consolidation? Market consolidation or what we are doing?.

Well, actually, both..

Okay, cool. I don't know. Baseball is not really my game..

Early innings in the consolidation of our manufacturing sites. I will answer that part..

Yes, and we hope we are in fifth to sixth innings..

Let me put it this way.

If you are rebuilding a classic car, Norman, is the engine in and is it up and running or what?.

Yes. I don't know yet..

We have some parts leftover..

Well, overall, do you feel more optimistic about where Europe is going or do the headwinds seem to be increasing?.

I guess we feel it, at least I feel little a more optimistic that the last two years there have been a number of things, especially with the meltdown in the Spain, in Greece and those kind to things but that all seems to be stabilized. It's just slow going..

I think that's especially true for the Life Science segment. We have really chartered along with the rest of the industry and some of the discretionary spending in Western Europe and it's tough to eek out any kind of growth there and at least for the first quarter in our Life Science segment, they saw double-digit growth in Europe.

Now some of that may be an easy compare but some of that is the spending coming back..

Right..

Unfortunately, offsetting that, our diagnostic business in Europe actually declined year-over-year on a currency neutral basis, and that goes back to what John was talking about a minute ago in terms of the really heavy competition we are facing in the tenders and pricing pressure that's not only coming from the competition but, frankly being put on by these government entities at the beginning of the tenders.

So some of that offset each other a little bit but all-in-all, I think there is some signs of improvement in Europe..

Okay, great. Now my second question was about Russia.

Anything happening to business there in light of what's going on?.

No, nothing. It seems to be so far business as usual..

Okay. Thanks very much..

Okay, and there are no further questions at this time..

Okay. Well, as always, everyone, thank you so much for taking the time to join us and we look forward to seeing you soon. Bye, bye..

Well, ladies and gentlemen, that concludes the presentation for today's conference. You may now all disconnect and have a wonderful day..