Ronald W. Hutton - Treasurer & Vice President Christine A. Tsingos - Executive Vice President and Chief Financial Officer John Goetz - Chief Operating Officer Shannon Hall - Executive VP & President-Life Science Group Norman D. Schwartz - Chairman, President & Chief Executive Officer John Hertia - EVP & President-Clinical Diagnostics Group Dan L.

Leonard - Analyst, Leerink Partners LLC.

Brandon Couillard - Jefferies LLC Bryan Langsam Engler - Great Lakes Advisors LLC Jeffrey L. Matthews - RAM Partners LP Scott Wilkin - UBS Global Asset Management.

Good day, ladies and gentlemen, and welcome to the Bio-Rad Laboratories, Incorporated Third Quarter 2015 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode to reduce background noise, but later we will be conducting a question-and-answer session. Instructions will follow at that time.

I would now like to introduce your first speaker for today, Ron Hutton. You have the floor, sir..

Thank you, Andrew. 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, our financial future performance and other matters.

Because our actual results may differ materially from these plans and expectations, you should not place undue reliance on these forward-looking statements and 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 over the call 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 third quarter of 2015 were $470 million, a decrease of 11.4% on a reported basis and versus the same period last year sales of $530.6 million. The currency headwind to sales was more than $49 million for the quarter.

On a currency neutral basis, sales decreased 2.2% when compared to last year. You may remember that on the second quarter earnings call we cautioned that the continued challenges in Europe coupled with seasonality could make for a tough quarter, especially for our Diagnostics group, and that certainly was the case.

In addition, our Life Science group also faced challenges, primarily related to a slowing of growth in various emerging markets as well as system and productivity challenges associated with the go-live of our new ERP.

Even with these challenges, during the quarter we did experience good currency-neutral sales growth across some our key Life Science and Diagnostic product lines, including sales of our Digital PCR consumables and our western blotting workflow products as well as our quality controls product line.

The reported gross margin for the quarter was slightly better than expected at 56.1% and compares to 54.4% in the year-ago period.

This improvement in margin versus last year is related to a more favorable product mix, lower cost as a result of the manufacturing operations and product lines that were shut down during 2014 and a decrease in amortization of acquisition-related intangibles.

The total non-cash purchase accounting expense recorded in cost of goods sold related to prior acquisitions was $6.7 million for the quarter, which compares to $8.1 million in the year-ago period. SG&A expenses for the third quarter were $187.4 million or 39.9% of sales compared to $202.6 million and 38.2% of sales last year.

The year-over-year decrease in expense relates to foreign currency translation as well as one-time items contained in the third quarter of 2014, including an accrual of $9.6 million in connection with the final settlement of the FCPA matter and a $3 million benefit related to the valuation of the purchase consideration for prior acquisitions.

And finally, quarterly SG&A includes a total of $1.9 million for the amortization of acquisition-related intangibles. Research and development expense in Q3 was 9.2% of sales, or $43.3 million, down both sequentially and versus last year.

This comparison reflects a decline in spending associated with the completion of key projects as well as some reduction related to currency translation. Going forward, we expect R&D expense to continue to be in the 9% to 10% of sales range.

During the quarter, interest and other income was a net expense of $7.3 million compared to $10.8 million last year. This improvement is partially the result of foreign currency exchange losses, which were substantially lower this year versus last year.

And as a reminder, the third quarter of last year included an additional $2.4 million of accrued interest associated with the FCPA matter. The effective tax rate used for the third quarter was approximately 32% and in line with our guidance.

Excluding any discrete items that may occur, we continue to expect the full year tax rate to be in the 31% to 33% range. This range excludes any impact from the potential reinstatement of the federal R&D tax credit which, once reinstated, will have a significant positive impact on the rate.

Net income for the third quarter was $17.4 million, which compares to $11.5 million in the year-ago period. Diluted earnings per share for the quarter were $0.59. Life Science reported sales for the third quarter decreased 13% to $150.4 million. On a currency-neutral basis, sales declined 5.9% versus last year.

Sales of our Droplet Digital PCR products continue to do well along with our V3 Western Workflow product family. However, revenue growth for the Life Science group overall during the quarter was significantly impacted by a slowdown in our supply chain activity in the wake of the go-live of our second deployment of SAP.

The temporary disruption in productivity while adapting to new systems and processes is not atypical, although the impact to the third quarter revenue was sizeable, especially in North America. We believe that this negatively impacted Life Science sales in the quarter by $5 million to $10 million.

The good news is that bookings remained strong during the third quarter and much of the disrupted revenue was likely a matter of timing and not a change in demand. Our Clinical Diagnostic group posted quarterly sales of $316.2 million, a decrease of 10.9% compared to last year. On a currency neutral basis, sales were down slightly about 0.5%.

Growth during the quarter was primarily fueled by good demand in our quality control products as well as our Bio-Plex business. On a geographic view, North America posted good growth with nearly every product line up versus the year-ago period.

Looking outside the U.S., our European markets continue to be negatively impacted by the challenges from lab consolidation and pricing pressure. And as I mentioned earlier, seasonality was also a factor in our slower growth. And now for a quick review of the balance sheet. As of September 30, total cash and short-term investments were $786 million.

Net cash generated from operations during the quarter was $82 million compared to $38 million last quarter and $91 million in the third quarter of last year. This decrease in cash flow versus last year is substantially related to the decrease in reported sales and includes approximately $42 million of currency headwinds in receivables.

Adjusted EBITDA for the quarter was $65 million, or 14% of sales. Net capital expenditures for the quarter were $24.7 million, which represents a decrease both sequentially and year-over-year. The decrease in spend for the current quarter is related to the timing of payments and will likely be paid before year end.

However, given the year-to-date run rate, our full-year expectation for CapEx is now slightly lower, in the $120 million to $130 million range. Depreciation and amortization for the quarter was $33.6 million. Moving to our outlook for the remainder of the year, we continue to anticipate strong currency headwinds to the top line.

Year-to-date, that headwind has been more than $146 million. On a currency neutral basis, year-to-date sales growth is 1.2% and below our original annual guidance of 3%.

Given the third quarter results and the continuing market challenges in Europe and coupled with our own systems-related issues in our Life Science group, we now expect full-year currency neutral sales growth in the 1% to 1.5% range for the full year.

As I mentioned earlier, the slowdown in our supply chain processes is likely a matter of timing and not lost sales, but it may take us into early next year to fully regain the tempo in recognized revenue. And finally, let's not forget that sales in the fourth quarter of last year were substantial, which could make for a tougher comparison.

From a profitability standpoint, our guidance has been for consolidated gross margins of 55% and an operating margin of 9% on a currency-neutral basis.

While year-to-date results are running at or slightly above our margin guidance, remember that historically our margins tend to drift down in the fourth quarter as product mix shifts more towards instrument sales and spending for projects becomes fully ramped.

As has been our practice in prior years, we will share our thinking and outlook for 2016 in February during the fourth quarter earnings call. And now we are happy to take your questions..

And our first question comes from the line of Brandon Couillard from Jefferies. Your line is open..

Thanks. I guess maybe this is a better question for John.

Could you elucidate some of the issues that occurred with the ERP rollout in the quarter? If I think back to the second quarter call in August, which was probably a month and a half after the initial rollout, it didn't sound like there were any disruptions or issues that had occurred at that time.

What changed really between now and then?.

Yeah, this is John Goetz. I guess what we've found is that the process timing, being able to take an order and get a product shipped, has taken a lot longer than we really realized at the time of the call. And really what that's done is it's moving shipments and sales recognition out beyond probably I think somewhere around two weeks.

So that's what we're looking at there. In addition I think the adoption of the system in our manufacturing plants has gone a little rockier than we've experienced during the first rollout. During the first rollout, we really had only one manufacturing plant come online.

With this one, this brought up all of the rest of our Diagnostic manufacturing as well as all of our Life Science manufacturing here in the United States, so this has added quite a bit of complexity.

So the amount of time and effort that we've had to be able to cover the questions and requests to respond to some of the concerns of our users has just taken us a little bit longer to get a handle on..

Which outstanding issues, if any, are still to be resolved? And, Christine, why would it necessarily take several quarters for the revenue trend to normalize?.

Sure. So I think a lot of this, Brandon, is just people getting used to how to use a brand new system. And we know from the first deployment that it takes six months to nine months for people to really get good at doing their jobs again with new processes, new screens, et cetera.

I think what we're facing here different in deployment two than deployment one, as John said, it really brings in our entire Life Science group, and much of their manufacturing is here and they ship to many places around the world, so it can ripple to a lot of locations around the world.

And people need to, as they get used to the processes, then things start flowing more quickly.

So part of the caution on how long it'll take is a little bit based on what we experienced with the first one, but also knowing that the complexity of this second deployment and the complexity of our Life Science business is even that much greater and could take more time to normalize.

And part of it, frankly, is that demand has been quite strong and so there was a lot hitting on the system at the same time people were getting used to these new processes..

Okay. And then in Life Science business, Christine, could you give us a sense of how the process chromatography media performed in the period? I believe you lapped a pretty tough comp there.

Was curious if that was an incremental headwind for the segment as well?.

Sure. And Shannon Hall, our President of Life Science, is here. So I'm going to let her talk about that as well in terms of the process media, a tough compare year-over-year..

Yeah, that period is a tough-to-compare period. But....

Yeah. It's a lumpy business..

Yeah, very much so. It's been a solid year so far. We continue to see great demand in that area, so I'd say it'd be easier to look at on a full-year basis..

Okay. And then last one finally, Christine or maybe this is a better one for Ron, I've been getting quite a number of questions from investors recently about your exact exposure to Sartorius. And I believe in your last Q for the first time you called out an unrealized gain of about $400 million which you attributed to the preferreds.

Was curious if you could quantify your exact exposure in terms of the preferred stock, either in number of shares or any round numbers?.

So, historically we really haven't disclosed exactly what we own in preferred shares. We do talk about what's on the books versus – the carrying value versus the estimated market value.

And as a reminder, the voting shares we are holding at cost, the preferred shares we mark-to-market and I think certainly they continue to do well and so the unrealized gain on our investment continues to increase as well..

Super. I'll hop back in the queue. Thank you..

Thank you. Our next question comes from the line of Bryan Engler from Great Lakes Advisors. Your line is open..

My question has been answered. Thank you..

Thank you. Our next question comes from the line of Jeffrey Matthews from RAM Partners. Your line is open..

Hi.

Can you hear me?.

Yes..

Hi, Jeff..

Hi.

Aside from the currency and the ERP, what were the big surprises operationally in the quarter, would you say?.

I think those are the two big ones. I think that the continued softness in Europe, I think that probably when we went into the year we were a little more optimistic about maybe being farther through the cycle, especially in France, with this lab consolidation, but it appears that we've got a ways to go with that..

Yeah....

Excuse me, why do you think that is, Norm? What's happening that keeps this ball rolling?.

It's just the continuous consolidation of labs, especially in France..

I think, remember, Jeff, we had a very strong market share position in France compared to some of our competitors. So as that market has consolidated in terms of the number of labs, we've probably felt a disproportional impact compared to other IBD providers in France because we had such a strong market share position there.

And I think some of the economic woes of the region are bleeding into Eastern Europe and that may be more than we would have anticipated at the beginning of the year. And you know regulatory changes continue throughout much of the emerging market world, both in Eastern Europe and Asia-Pacific..

Okay.

And that leads to my next question which is, what have you seen in China and Japan this last quarter? What's new and different?.

Not much is new and different, I would say. Japan continues to hobble along at a slow pace for both Life Science and Diagnostics. China, it's kind of running about the same as it has been.

Certainly I think some of the slowdown that we have experienced in China this quarter has been related to the ERP implementation and being able to ship products and recognize the revenue in the quarter, but I think the underlying market is still about the same..

Okay. So I guess ERP-wise then, IBM is happy to get to keep all their people there and spend a lot more time trying to help you out..

Yeah. I would say it's largely a learning curve. The system is running. I think it's running pretty well. It's just our adapting to the way it works and changing our mindset around the discipline of this system is probably the biggest challenge..

It sounds like what John was saying earlier, you went from the first iteration, you added one plant. This time you added multiple plants. And I would imagine it's mainly just a function of the scale of it.

Is there anything that you see in it that makes you any less enthusiastic about what you're thinking the outcome will be, or does it change your timing of the rollout in Europe?.

No, I think we're still enthusiastic about it. I think the people who are using it see the benefits of it. It's just a matter of getting used to it and learning to use it as a tool. It's kind of like when you pick up a hammer or a saw for the first time, it takes a while to get acclimated to it and to learn how to use it.

I think it's the same thing with this system..

And how about timing on the European implementation? Any change there?.

Yeah, we've been continuing to talk about going live in Europe during 2017 and we'll spend much of 2016 doing the design. With each deployment, the complexity increases as we take it to more complex pieces of our business.

And without question, the life science business model is much more complex than a diagnostic business model and the number of products is at least three times. And so the second deployment was a big implementation for us. That'll actually help us a little as we go to Europe, because most of the products will be in the system already.

So hopefully we'll be able to stay on the projected timeline of going live in a series of deployments during 2017 as we roll through Europe..

Okay, thanks. And final question and I don't know what you can say about this, but this whistle blower case related to the FCPA stuff seems to be creating new precedents into law.

Has this continuation of it in its current iteration had any impact on your settlement? Is there anything that could come out of this that could affect the P&L that we should be aware of, or is this just a side issue?.

I think it's probably better not to comment on items that are currently open litigation..

Understood. Thank you..

Thank you. It looks like we have a follow-up from Mr. Couillard from Jefferies. This is Brandon Couillard from Jefferies. Your line is open..

Thanks. Go all the way around the horn, a question for John Hertia.

Could you give us an update on where the IH 1000 stands with the FDA, whether you've had any dialogue or feedback from the Agency, which seems to be holding up the approval? And then in terms of the BioPlex 2200, would love to get a status update on where you stand in terms of the menu rollout and any round numbers you can give us in terms of placement growth activity year-to-date..

Sure. Brandon, this is John. Maybe we'll address the IH 1000 first. So we are in constant dialogue with the FDA. Still pretty optimistic that we'll get news before the end of the year on the IH 1000 and the North American gel launch and also the infinity System, which is targeted at our mid-volume laboratories.

On BioPlex, we're seeing I would say increased traction in autoimmune. We've had really good response to celiac and our measles panel, also the addition of vitamin D and HIV. And we're seeing a wave of, let's say, increased requests for second and third placements within accounts that had BioPlex upfront and that's been really good news..

Great. Thanks..

Thank you. Our next question comes from the line of Jeffrey Matthews from RAM Partners. Your line is open..

Hi. Thanks. Norman, Theranos seems to be imploding. I don't know if you were as surprised as I was reading about it. Wondered if you had any thoughts about what it means for what they were ultimately trying to do.

Does it cast doubt on the whole notion of this liquid biopsy explosion or is it a one-off bad business model kind of thing?.

I don't know. It's really hard to say. I guess I would put this down to maybe growing pains. And it seems like any young company goes through a few of these things. I think there's certainly some value in what they're trying to do and the audience that they're trying to reach and so we'll have to see how they navigate it..

All right. Thank you very much..

Thank you. Our next question comes from the line of Dan Leonard from Leerink. Your line is open..

Thanks. And I hopped on late, so apologies if it's been asked already. But you called out Digital PCR again as a growth lever in the Life Sciences business.

Can you give us an update on how large that business is, either in terms of revenue or placements and then also any insights into the Droplet next-gen sequencing instrument that you might be able to offer?.

So, Dan, as you know, we don't give out details of our revenue by our various product lines.

We believe it continues to do very well, both in terms of revenue and the instrument placements all over the world and another encouraging sign is how our customers are using the product itself and the papers that continue to be published which then has a kind of a self-fulfilling prophecy of generating even more demand for that product.

But it's not something we've given out specific information on in terms of the size of that business..

But it does sound like you continue to expect it to be a good growth driver going forward?.

Yes..

Yeah..

Got it.

And then the Droplet sequencing instrument, is there any updates to be had there?.

Development and....

Okay. Well, certainly that continues to be under development. They're making good progress. I don't have an exact schedule for you, but it's still a little ways off..

Got it. Thank you..

Thank you. Our next question comes from the line of Scott Wilkin from UBS. Your line is open..

Thank you and good afternoon. I was just hoping – I think maybe John is probably the best equipped to answer this.

I was just curious if you could put a little more color on the lost sales of $5 million to $10 million in the quarter and how you're confident that that's not business that's going elsewhere? I understand maybe you're slow to be able to ship the revenue.

It's just when I think about researchers doing experiments and ordering product, they're doing it as they need to do the experiments, right? And so how is this not leading to lost business as opposed to a delay?.

Okay. Well, we're very close to our customers, number one. And through this launch of the system, we've been monitoring customer satisfaction pretty closely. And we have the ability to, let's say, flex a little bit about where products can go. And so if I think about what the impact has been, it's just added time for us to get products shipped.

And the adoption has also caused us a little bit of problem with backorders. The combination of those two things has caused what we're thinking about in this $5 million to $10 million range. But in terms of, do we think we're going lose the business? We don't believe we will.

Bookings are strong and, as I said, we're staying very, very close to our customers..

Yeah....

Go ahead, Christine..

Scott, I would also add that a lot of this is instrument-related and there it's not so much the day-to-day I need more consumables for my experiments that I really need that instrument. And for us, the larger instruments need to not only be delivered but also accepted by the customers, et cetera.

And so as the timeline gets pushed out, it can push sales from one period to the next..

I see. So what you're saying is, you expect the backorder to persist through Q4 and it's more instrument-related so it's not a daily consumable issue..

Some level could persist. Since this quarter-end, we have been tracking it in great detail every single week and see with each passing week it's getting better and better. But there's a fair amount of demand. I guess that's the good news in it..

Okay. Thank you..

Thank you. We will hold for one moment to see if anyone else wants to queue up. And that looks like all the questioners that we're going to have for today, so I'd like to turn the call back over to management for closing remarks..

Okay. Great. Thank you, Andrew. And thank you, everyone, for joining us today. Bye-bye..

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may now disconnect your telephone lines at this time. Everyone have a great evening..