Ron Hutton – Vice President, Treasurer Christine Tsingos – Chief Financial Officer, Executive Vice President John Hertia – Executive Vice President, President, Clinical Diagnostics Group.

Justin Bowers – Leerink Jason Lazarus – Intrepid Capital.

Good day ladies and gentlemen and welcome to the Q4 and Full Year Bio-Rad Laboratories Inc. Earnings Financial Results Conference Call. My name is Kay and I’ll be your operator for today. And at this time, all participants are in listen-only mode. We will conduct the question-and-answer session towards the end of this conference.

[Operator Instructions] And as a reminder, this call is being recorded for replay purposes. I’d like to turn the call over to Ron Hutton, Vice President and Treasurer. Please proceed sir..

Thank you, Kay. 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’d 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. Today, we will review the fourth quarter and full year financial results for 2014 as well as provide some insight into our thinking for 2015.

With me today, our CEO, Norman Schwartz, COO, John Goetz, Shannon Hall, President of our Life Sciences Group, and John Hertia, President of our Diagnostics Group. Let’s start with a review of the quarterly sales or results.

Today, we are pleased to report net sales for the fourth quarter of fiscal 2014 of $598.2 million, a slight decrease when compared to the year ago period sales of $602.6 million. On a currency neutral basis, however, quarterly sales actually grew 4.5%. This dramatic difference represents a currency headwind of more than $30 million on the top-line.

During the quarter, we experienced good currency neutral sales growth across many of our product lines, most notably in our life science group including continued strong sales of our Droplet digital PCR products and our cell biology product line.

Our diagnostics group also posted good growth for the quarter with strong sales of our diabetes monitoring, autoimmune and blood typing products as well as quality controls. The consolidated growth margin for the quarter was 53.1% and compares to last year’s gross margin of 53.6%.

This reported gross margin is lower than expected and reflective of approximately $8.4 million of one-time cost associated with the discontinuation of a small product line. Excluding this charge, the consolidated gross margin for the fourth quarter would have been 54.5%.

In addition, during the quarter, we recorded a total of approximately $7 million in cost of goods sold for the non-cash purchase accounting expense related to prior acquisitions. This compares to $8.3 million of amortization expense in the year ago period.

SG&A expense for the fourth quarter was $207.5 million or 34.7% of sales compared to $214.6 million or 35.6% of sales last year. The current quarter SG&A include $7 million of non-cash expense related to the reevaluation of contingent consideration for the acquired cell sorting and diagnostic sequencing technology.

Offsetting this expense was currency translation, which effectively lowered SG&A on a reported basis by about the same amount. And finally in SG&A, the amortization of intangibles related to prior acquisitions in the fourth quarter was approximately $2 million and down slightly from a year ago period.

Research and development expense in Q4 was 9.9% of sales or $59.3 million versus $55.8 million last year. This increase in R&D spending from last year is primarily the investment in the development of a diagnostic targeted sequencer based on our acquisition of new vial in April 2014.

Also impacting R&D expense for the fourth quarter is approximately $3 million of one-time expense associated with the discontinuation of the small product line I mentioned earlier. The reported operating margin for the fourth quarter was 8.5%.

If we exclude the $18.4 million of one-time cost associated with the product discontinuation as well as expense related to the revaluation of contingent consolidation, today’s operating margin for the quarter was more than 11%. Interest in other for the quarter was a net expense of approximately $4.8 million compared to $7.8 million last year.

This improvement reflects reduced interest expense as well as higher investment income. The effective tax rate used in the fourth quarter was lower than expected at 14.7%. The results of the reinstatement of the federal R&D tax credit for 2014 as well as a reduction in certain tax reserves and valuation allowances.

Reported net income for the fourth quarter was $39 million or a $1.34 per share on a fully diluted basis compared to $30.1 million last year or $1.04 per share. Excluding the $18.4 million of one-time expense mentioned earlier, we estimate that fully diluted earnings per share would have been approximately $1.78 for the quarter.

Our life science group reported strong sales for the fourth quarter of $223.7 million, a growth of 1.5% versus last year. On a currency neutral basis, sales increased an impressive 6.3% for the quarter.

As I mentioned earlier, these quarterly results reflect continued strong sales of our digital PCR systems and consumables as well as our family of cell biology products. On a geographic basis, currency neutral sales grew across many regions for life science, most notably North America, China and Europe.

Our clinical diagnostic group also achieved good sales for the quarter of $370.3 million compared to $377.9 million last year, a decrease of 2% on a reported basis, but growth of 3.6% currency neutral.

These sales were led by continued strong performance in the quality controls and diabetes product line as well as solid growth for blood typing and BioPlex 2200 revenue. On a geographic view, diagnostic currency neutral sales for the quarter increased most notably in China, North America and the emerging market.

Looking at the full year results, we are pleased to report annual revenues of $2.175 million, an increase of 2% versus last year on a reported basis. On a currency neutral basis, sales for the year grew 3.2% and ahead of the guidance we laid out at the beginning of the year.

Our life science group posted annual sales of $728 million, an increase of 2.6% versus 2013 and growth of 4% currency neutral. The sales growth was fueled by continued strong sales of our digital PCR instruments and consumables. We also saw good annual growth in our cell biology and process media product.

From a geographic view, sales in North America, Europe and China were the biggest contributors to year-over-year growth for the Life Science Group. In the year, clinical diagnostic sales were $1.432 billion, a growth of 1.7% on a reported basis and 2.9% on a currency neutral basis.

This growth was fueled by continued momentum in quality control, autoimmune and diabetes monitoring products. On a geographical view, sales in North America, China and the emerging markets were the biggest contributors to year-over-year currency neutral sales growth to the diagnostics group.

Total company gross margins for the full year were 54.2%, which compares to 55.3% in 2013. The decrease in margin versus last year is primarily the result of significant one-time charges in the discontinuation of small product line and the consolidation of some of our small manufacturing operations during 2014.

For the full year, these one-time charges totaled more than $11 million. Also important to note, total amortization of intangibles and purchase accounting recorded in cost of goods sold for the year was $31.5 million.

SG&A expense as a percent of sales was 37.2% for the year and higher than we estimated at the beginning of 2014, driven primarily by the $19 million FCPA accrual taking during the year. Other drivers of the higher expenditures when compared to the prior year were the results of increased spending associated with the addition of the GnuBIO business.

And finally in SG&A, total expense for acquisition-related amortization was $8.4 million for the full year. Research and development expense in 2014 was $220 million or 10.1% of sales and compares to $211 million last year.

This increase is the direct impact from the addition of GnuBIO as well as spending for new instruments for blood typing and diabetes monitoring. Looking to 2015, R&D expense as a percentage of sales will likely stay in at 9% to 10% level, as we move a number of investments through the development pipeline.

Net income for the full year was $88.8 million versus last year’s net income of $77.8 million. Fully diluted earnings per share for the year were $3.05.

The effective tax rate for the full year 2014 was 32.5% and higher than our 2013 full year tax rate of 30.8% due to both the increased operating profit as well as the mix of sales in higher tax jurisdiction. For 2015, we expect the effective tax rate excluding any discrete items that may occur, to be in the 33% to 35% range.

This range assumes no federal R&D credit in 2015. If and when that is reinstated, our full year effective tax rate could decline by two percentage points. And looking at the balance sheet for 2014, Bio-Rad balance sheet remained strong.

As of December 31, total cash and short-term investments were $698 million compared to $609 million at the end of last year. Net cash generated from operations during the fourth quarter was $40.2 million and $273.3 million for the full year 2014. Remember that during the fourth quarter, we paid $55 million to the U.S.

government related to the resolution of the FCPA matter, which negatively impacted the quarterly cash flow results. However, despite this sizeable payment, cash flow from operations increased more than $100 million versus 2013. The year-over-year increase in cash flow as a result of the higher sales as well as lower interest expense and taxes paid.

EBITDA for 2014 also remained strong at more than $300 million, which includes $90 million of EBITDA generated in the fourth quarter. Net capital expenditures were $40.3 million for the quarter and $120.8 million for the full year slightly below the $125 million to $135 million range estimated on our last call.

Looking to 2015, we estimate that CapEx spending will be in the $130 million to $140 million range as we continue to invest in our global ERP system and facility. And finally, depreciation and amortization for the quarter was $39.8 million and $150 million for the full year. Looking to 2015, we see several opportunities for growth on the top-line.

The momentum we are seeing in many of our life science product lines is encouraging for future growth. In addition, funding for the research for research around the world seems to be improving.

On the diagnostic side the business, we also see opportunities for currency neutral growth in many of our core businesses including new instruments for the blood typing and diabetes monitoring market.

Offsetting some of this growth, we continue to face sizable challenges in the diagnostic market including an expected decline in Europe, which is fueled by price pressure in government tenders as well as laboratory consolidation in selected markets around the world.

The combined result of opportunities and challenges leads us to the expectation of sales growth in 2015 similar to what we saw in 2014 that is around 3% on a currency neutral basis for the full year.

With regard to margin, we are expecting to make solid currency neutral improvement in our profitability in 2015 even in light of another year of significant spending for new technologies in IT systems.

During 2014, we dialed up focus on our many growing product areas where we have market leadership and as such, undertook numerous actions to consolidate smaller manufacturing operations and discontinued smaller unprofitable product lines.

And while this resulted in some sizable one-time charges in 2014, we expect these actions to benefit operating profit by more than $10 million in 2015 and beyond. In addition, 2015 should also be a year where numerous technologies in new business investments become less of a headwind of profitability as sales of these products continue to grow.

Having said that, it is important to note that, we will now include a full year of investment in the new biotechnology, which will offset much of that progress. And lastly, we will benefit from not having the FCPA related accruals that occurred in 2014.

In some, our consolidated currency neutral outlook for full year gross margin is to be around 55% despite price pressure across several product lines and regions and our outlook for the currency neutral operating margin is to be around 9% for the full year.

Now, before we get ahead of our sales, we need to include the impact of foreign currency and our outlook for 2015. As many of you know, Bio-Rad has always been a very global company in terms of both sales and operations and currency can have a significant impact on our reported results. More than 65% of our sales are non-U.S.

dollar and we estimate that around 35% or 40% of our expenses are non-U.S. dollar. As such with today’s strong dollar environment, currency has a significant negative impact to our financial outlook. As I mentioned, our outlook for currency neutral sales growth in 2015 is 3%.

However, using current exchange rate, currency could actually result in a revenue headwind of $175 million to $200 million and a decline in year-over-year reported sales.

And while we do have some natural hedge with the non-dollar expenses, this currency headwind could impact our expected operating margin by 150 basis points or more and essentially mask the great progress that we are making with operating profit. In closing let me just say that despite what hopefully would be a temporary currency headwind on a result.

We remain highly committed to focusing on ways to create greater operating leverage, while at the same time continuing our investments in new technologies and systems.

It is through these new products and technologies and a more efficient footprint that we can improve our gross profit and it is through changes in our organizational structure and implementing new global IT systems that we can reduce our overall operating cost.

All of which will ultimately contribute to moving our operating margin into the mid-teens is not better. And now we are happy to take your questions..

[Operator Instructions] Please standby for your first question, which comes from the line of Brandon Couillard, Jefferies. Please go ahead..

Hi, this is Justin [ph] in for Brandon..

Hi..

Would you give us an update on the U.S.

launch of the new blood typing platform?.

Sure, I’ll turn that one over to John Hertia..

So the U.S. launch of the new blood typing platform, so we’ll be introducing in the later part of this year, a blood typing platform has been available in the rest of world called the IH 1000, it hasn’t been available in the U.S. because of the FDA we’re going through FDA registration and approval right now.

We also will be launching this year Justin on the IH 500 in Europe and parts of Asia-Pacific, which is also a new blood typing platform that’s sort of a logical extension of the IH 1000 name targeted for the sort of mid-market blood typing segment..

I think Justin in terms of the model, the expectations is entering the U.S. market comes later in the year, and so it’s probably a bigger impetus growth in 2016, but we’re hopeful that will get that FDA approval this year..

Got it. Very helpful.

Moving towards the ERP, will you quantified the expected impact on the P&L from the ERP expenses in 2015?.

Sure, I think for spending on ERP for the project itself, the spending in 2015 should be pretty similar to what we’ve spent in 2014 and that’s kind of $25 million to $30 million range in terms with the expense and around $40 million in terms of capital.

The one thing that I would keep in mind is we are right now scheduled to go live with our next appointment in the July, August timeframe, in which case we’ll take on some depreciation expense and that will probably be an incremental $5 million to $10 million between depreciation and support during ’15.

So net-net with the go live we may pickup $10 million of additional expense with the project spend itself should remain fairly flat year-over-year..

Got it. Thanks.

Speaking of go live, we comment on which business divisions or geographies will migrate onto the new platform?.

Of course. As a reminder first go live was in April 2013 and it was a smaller portion of U.S. business that included our U.S. diagnostic sales and a smaller division. Deployment number two, which as I mentioned we’re hoping to go live in July and August, and brings in the rest of the U.S.

and actually North America and what that means are more about our diagnostics operations in the U.S. as well as our life science operations in the U.S. and some of our selling entities in Canada.

And once we complete that then our plan is to move into the European theatre, which is a very difficult implementation for us, its several deployments, but one that probably have the greatest benefit and payback for us and that will be our focus on late this year and certainly throughout ’16..

Got it. Thank you..

Thank you. And the next question comes from the line of Dan Leonard, Leerink. Please proceed..

Hi, good afternoon. This is Justin on for Dan.

So just in terms of the EBIT guidance for 2015, what’s baked in there?.

So I think what baked in there is improvement from some of the consolidation that we’ve done improvement from some of the underwater businesses if you will, becoming less underwater. It’s also baked in an incremental probably $13 million to $15 million of spend is related to GnuBIO.

But so tremendous amount of progress in savings taking on some additional spend with GnuBIO and assuming a 3% currency neutral top-line gets us to this operating margin of around 9% and then using current exchange rates, it takes us backwards because of the translation..

Okay. So, the 150 plus FX impact is factored in there and you’re using current spot rates..

Right. So, the 150 debt is really kind of what happens to that 9% margin as currency rates stay where they are – that 9% margin goes to 8 or lower, because $175 million, $200 million sales are not recognized or on a reported basis, they are not there and it’s just translation..

Okay, understand. Thank you.

And then in terms of GnuBIO and kind of the dPCR synergy there, can you just give us an update on your efforts there?.

Well, we continue to make progress on the – with the GnuBIO platform, it certainly still underdevelopment, a tremendous amount of synergy between the Droplet technology that we have developed and acquired few years ago and in this operation, so it’s a – we really been able to leverage that pretty well.

Again making progress, we continue to – there is obviously still work to be done to get to a product probably take us most of this year..

Okay. And then it’s the first time we mentioned cell bio and process media is a kind of source of strength and why also could you just kind of talk about what you’re seeing in that – in those product lines..

Well, I think that especially in the cell bio area, this is an area we started investing in few years ago and I think that what you’re seeing today just represents some momentum that we’re starting to achieve from these many products and the new thing that we’re just introducing, so I think that’s what you’re seeing..

Okay. And it sounds like China came in especially in life sciences a little better that what you are talking about in the last quarter.

Can you just talk about what you are seeing in that geography and maybe just how things are trending in the first quarter?.

Well, I think last year, little bit of hiccup early in the year when China was kind of doing their corruption crack down and it’s kind of spooked everyone there and in terms of buying and that slowed us down quite a bit. And I think then we kind of probably pull back a little bit on our outlook.

But seem to comeback especially at the end of the year really well and we ended up the year in a good position. I think we continue to have momentum in China both in the life science area and in diagnostics..

Great. And just one last one thought on capital deployment..

Sure, so as I mentioned in the scripts, our expectation for CapEx in 2014 is that $130 million to $140 million and that includes about $40 million, $45 million of capital spend for this project to roll out SAP on a global basis.

Within our CapEx, we also have our reagent rental, the instruments that we place on the diagnostic side, and that varied from year-to-year but generally that’s $40 million to $50 million range is the portion that relates to that and then the remaining third is more either facilities, investments or maintenance type CapEx..

Alright, thank you..

Thank you. [Operator Instructions] And the next question comes from Jason Lazarus, Intrepid Capital. Please proceed..

Hi, guys, thanks for taking my question. Almost everything has been asked really around ERP system.

Is it still expected cost $300 million?.

Yes and it could be more. A lot of the unknown is as we rollout other parts of the world, complexity of this implementation both unwinding systems that are already in place, as well as bringing our international operations on to this standardized system.

It has and we’ve learned our lesson through these past years that it’s often harder than we originally anticipate and these projects, the majority of the cost is human capital, whether it’s outside capital or own people working on the project.

So that’s – that’s my caution that I think $300 million is probably a minimum to assume for the project and we are continually working to be a decision as we can. But we are about to embark on the most difficult faces of the project as we take it outside of the U.S..

Understand and appreciate the extra color on that.

Can you tell me how much of that has been spent so far? And I have a good idea, but some more concrete figures would be helpful?.

We are probably a little over half way through that amount and again, the ultimate total will be the ultimate total. But depending on how you want to measure it, we did a lot of upfront work before we really started the project. If you want to include that amount of money, then we’re probably further along in the stand.

But the true project itself is probably around $150 million to $170 million..

Okay. That’s all I got. Thanks..

Thank you. [Operator Instructions] You have no questions at this time..

Okay. Thank you, Kay. Thank you everyone for taking the time to join us today. We appreciate your interest in your support. Bye-bye..

Thank you for participation in today’s conference. This concludes the presentation. You may now disconnect. Good day..