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

Dan L. Leonard - Leerink Partners LLC Brandon Couillard - Jefferies LLC.

Good day, ladies and gentlemen, and welcome to the Bio-Rad Laboratories, Incorporated Fourth Quarter and Full Year 2015 Financial Results Conference Call. At this time, all participants' are in listen-only mode. Later we will conduct a question-and-answer session. And instructions will follow at that time. As a reminder, this call is being recorded.

I'd now like to introduce your host for today's conference, Ron Hutton, Treasurer. Please go ahead..

Thank you. 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 future financial 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. Today we will review the fourth quarter and full year financial results for 2015 as well as provide some insight into our thinking for 2016.

With me today are, Norman Schwartz; John Goetz; Shannon Hall, President of our Life Science Group; and John Hertia, President of our Diagnostics Group. Let's start with a review of the quarterly results.

We are pleased to report net sales for the fourth quarter of fiscal 2015 of $570.6 million, a decrease of 4.6% when compared to the year ago period sales of $598.2 million. On a currency neutral basis however, quarterly sales actually grew 2.8%. This dramatic difference represents a currency headwind of more than $44 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, process media, 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 control. The consolidated gross margin for the quarter was in-line with expectation at 54.1% and compares to last year's gross margins of 53.1%.

The improvement in gross margin is largely the result of approximately $8.4 million of one-time cost in the fourth quarter of last year associated with the discontinuation of a small product line.

In addition, during this fourth quarter, we've recorded a total of approximately $6.6 million in cost of goods sold for the non-cash purchase accounting expenses related to acquisition. This compares to $7 million of amortization expense in the year ago period.

SG&A expense for the fourth quarter was $193.1 million or 33.9% of sales compared to $207.5 million, or 34.7% of sales last year. When compared to last year, the current quarter SG&A includes benefit related to currency translations which effectively lowered SG&A on a reported basis by about $11 million.

In addition, the current quarter includes a contingent consideration benefit of $4.9 million. And finally in SG&A, the amortization of intangibles related to prior acquisitions in the fourth quarter was approximately $1.6 million, down slightly from the year ago period.

Research and development expense in Q4 was 9.8% of sales, or $55.9 million versus $59.3 million last year. This decrease in R&D spending from last year is primarily related to the completion of key projects as well as expense taken in 2014 for the discontinuation of a product line.

With the strong sales growth, improved gross margin and lower operating spend, the reported operating margin for the fourth quarter was better than expected at 10.4% and compares to 8.5% in the fourth quarter of last year.

However, when thinking about last year, we remember that the fourth quarter of 2014 included one-time expenses related to the shutdown of certain product lines as well as contingent consideration charges. Interest and other for the quarter was a net expense of approximately $5.3 million compared to $4.8 million last year.

The effective tax rate used in the fourth quarter was significantly lower than expected at 8.7%, a result of the reinstatement of the federal R&D tax credit for 2015, a reduction in certain tax reserves and a tax benefit from excess foreign tax credits related to a dividend from one of our foreign subsidiaries.

Reported net income for the fourth quarter was $49.5 million, or $1.68 per share on a fully diluted basis, compared to $39 million last year or $1.34 per share. Excluding the discrete tax items I just mentioned, we estimate that earnings per share would have been $1.31. And now for certain segment information.

Our Life Science Group reported strong sales for the fourth quarter of $218.1 million. This represents a decline of 2.5% versus last year. However on a currency neutral basis, sales increased 3.4% for the quarter.

As I mentioned earlier, these quarterly results reflect continued strong sales of our Digital PCR systems and consumables as well as process media and our family of cell biology and western blotting products. On a geographic basis, currency neutral sales grew across many regions of Life Science, most notably North America, China and Europe.

You may recall that during the third quarter, Life Science sales were negatively impacted by system and productivity challenges associated with the go live of our second deployment of SAP. And on the last earnings call, we signaled some caution regarding the group's ability to catch up the backlog especially in the face of sizeable Q4 demand.

Today we are pleased to report that the system-related challenges have been substantially remediated. Our Clinical Diagnostics Group also achieved good sales for the quarter of $348.6 million, compared to $370.3 million last year, a decrease of 5.9% on a reported basis but growth of 2.5% currency neutral.

These sales were led by continued strong performance in the quality control 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 markets, while sales in Europe continued to decline. Looking at the full year financial results, we are pleased to report annual revenues of $2.019 billion.

While this represents a decrease of 7.2% versus the last year on a reported basis. On a currency neutral basis, sales for the year grew 1.6%. This dramatic swing reflects a currency headwind to sales of more than $190 million for the full year.

Our Life Science Group posted annual sales of $695 million, a decline of 4.6% versus 2014 and growth of 2.5% currency neutral with the swing representing $52 million of currency headwind. This growth was fueled by continued strong sales of our Digital PCR instruments and consumable.

We also saw good annual growth in our western imagers and reagent, cell biology and process media products. 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.

For the year, clinical diagnostic sales were $1.310 million, a decline of 8.5% on a reported basis, but growth 1.1% on a currency neutral basis, a currency headwind of $138 million for the full year. This growth was fueled by continued momentum in quality controls, autoimmune and diabetes monitoring products.

On a geographic view, sales of North America, China and Latin America were the biggest contributors to year-over-year currency neutral growth for the Diagnostics Group. Total company gross margins for the full year of 2015 were in line with guidance at 55.5% and compares to 54.2% in 2014.

The increase in margin versus last year is primarily the results of a more favorable product mix as well as the one-time charges for the discontinuation of small product lines and consolidation of small manufacturing operations during 2014.

Also, important to note, total amortization of intangibles and purchase accounting recorded in cost of goods sold for 2015 was $27.4 million. SG&A expense as a percent of sales was 37.7% for the year, or $762 million and compares to $808 million in 2014.

The decrease in spend year-over-year relates to benefit associated with the stronger dollar as well as the reduction in overall contingent consideration and the absence of the FCPA related settlement accrual taken during 2014. And finally in SG&A, total expense for acquisition related amortization was $7.4 million for the full year.

Research and development expense in 2015 was $193 million or 9.6% of sales and compares to $220 million, or 10.1% of sales last year.

This decrease is a result of the discontinuation of an underperforming product line in 2014 as well as the wind down of spending for new instruments for blood typing and diabetes monitoring that were launched earlier in 2015.

Looking to 2016, R&D expenses as a percentage of sales will likely stay at that 9% to 10% level, as we move a number of investments through the product development pipeline. Net income for the full year was $113 million versus last year's net income of $88.8 million. Fully diluted earnings per share for the year were $3.85.

The effective tax rate for the full year 2015 was 22.5% and lower than our 2014 full year tax rate of 32.5% due to the previously mentioned discrete items affecting the fourth quarter as well as the mix of sales in lower tax jurisdiction.

For 2016, we expect the effective tax rate excluding any discrete items that may occur to be in the 30% to 32% range. For 2015, Bio-Rad's balance sheet remains strong. As of December 31, total cash and short-term investments were $790 million compared to $698 million at the end of last year.

Net cash generated from operations during the fourth quarter was $36 million and $186.2 million for the full year 2015. This compares to net cash generated from operations in 2014 of $273 million.

The year-over-year decrease in cash flow is substantially related to the lower sales on a reported basis and includes approximately $31 million of currency headwinds and receivables. EBITDA for 2015 remained strong at nearly $300 million, which includes $94 million of EBITDA generated in the fourth quarter.

The EBITDA margin improved to 14.8% of sales and compares to 14% in 2014. Net capital expenditures were $28 million for the quarter and $112 million for the full year, slightly below the $120 million to $130 million range estimated on our last call.

Looking to 2016, we estimate that CapEx spending will increase to the $140 million to $150 million range as we continue to invest in our global ERP and other systems as well as some foundational projects in Europe. Finally, depreciation and amortization for the quarter was $33.9 million and $131.8 million for the full year.

Looking to 2016, we see several opportunities for growth on the topline. The momentum we are seeing in many of our Life Science product lines is encouraging for future growth. In addition, funding for research around the world seems to be improving. As such, we are targeting an increase in the Life Science growth to be in the 4% to 5% range.

On the Diagnostics side of the business, we also see opportunities for currency neutral growth in many of our core businesses, including an increase in consumable sales associated with our new instruments for the blood typing and diabetes monitoring markets.

Offsetting much of this expected growth, we continue to face some sizable challenges in the diagnostic market, including a continued decline in Europe, price pressure in government tenders and lab consolidation in selected markets around the world.

As such, we are targeting the diagnostic currency neutral growth rate to be similar to the 2015 rate of 1% to 1.5%. Overall, the combined result of the opportunities and challenges across both businesses, leads us to the expectation of sales growth in 2016 of around 2.5% to 3% on a currency neutral basis for the full year.

With regard to margin, you can see that we made solid currency neutral improvement to our profitability in 2015, even in light of another year of significant spending for new technologies and systems. During 2015, we improved the gross margin by more than 100 basis points and are targeting to maintain, if not slightly improve those levels in 2016.

In thinking about the operating margin for 2016, we continue to see sizable investment in the pipeline as we move our global ERP project to Europe, our most complex region from an operating standpoint.

During the year, we will not only be investing in the ERP design and implementation, we will also be investing in new infrastructure and organizational improvement to ready the region for a more efficient footprint and transaction flow post-SAP. All of these projects require a significant increase in spending.

Having said that, we do not want to take away the gains made during 2015 and we will work hard to maintain a currency neutral operating margin around 8% to 8.5% for the full year. On a reported basis, the strong U.S. dollar will continue to have a negative impact on our reported results for 2016 at least for the first half of the year.

As many of you know Bio-Rad is a very global company in terms of both sales and operation and currency can have a significant impact on our reported result. 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 can have a significant negative impact to our financial outlook. As I mentioned during the 2015 results comments, changes in foreign currency negatively impacted our revenue by more than $190 million for the year.

And as I mentioned, our outlook for currency neutral sales growth in 2016 is 2.5% to 3%. However, if we use exchange rates as of December 31, currency could actually result in a revenue headwind of $50 million to $75 million and perhaps flat 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 50 basis points or more and essentially mask the great progress that we made with operating profit.

In closing, let me just say that despite a relatively flat outlook for 2016 profitability, we will remain highly committed to focusing on ways to create greater leverage in our operating expenses, 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 a significant improvement in our operating margin in the years to come.

And now I'll turn things over to Norman for a few comments..

Thank you, Christine.

So, I think it's fair to say, while currency had an overwhelming effect on the reported results, I mean, I think you can see from Christine's comments that we did make progress on many fronts, kind of the underlying currency neutral sales growth did benefit from a wave of new products that were not only introduced in late 2014, but also supplemented by some of the notable introductions and regulatory clearances that we had from 2015, and certainly we expect continued travel from those.

I think that internally much of our attention was focused on our ERP project, deployment two in this last year and also completing the restructuring of our operations. With the implementation of these global systems, we saw the opportunity to move to what we think of as a more functional structure which we spent much of 2015 implementing.

I would say the two most notable or principle changes we made were to globalize our commercial or the selling operation and to globalize our supply chain. We spent much of the year establishing the structure filling the positions created by this change.

I think we were fortunate in this regard to have some good bench strength and feel the majority of these positions from within. We do see much potential from this organization. The product groups can now focus their attention to our markets and ensure we continue to develop the innovative quality products that we are known for.

And the globalization of our sales and service organization should allow us to think more globally. And really to better serve our increasing number of global customers. And finally, our new supply chain organization which encompasses procurement, manufacturing and distribution.

I think for us functionalizing these areas and globalizing these areas gives us many opportunities to drive both efficiency and effectiveness for the company. Obviously, it will take some time to see the results. But, we do expect them to be measurable.

I do feel we have now largely completed this transition and it appears that everyone's excited about what we can accomplish for the company going forward. So with that, I guess we will open it up to questions..

Thank you ladies and gentlemen. Our first question comes from the line of Dan Leonard with Leerink. Your line is open. Please go ahead..

Thank you.

First of all, on the ERP, is there any way to think about – if you had any boost in the fourth quarter from resolving some backlog that was left over from the third quarter issues? Or do you consider the fourth quarter organic sales growth to be a run rate number?.

Dan, that's a really great question. And you may remember on the third quarter call, we were kind of estimating that disruption could have been $5 million to $10 million range and it's really hard to pinpoint that number. But I think we made up at least 90% of whatever that number was, pick something in the middle, $7 million, $8 million.

I think that was part of the growth in Q4, but it's difficult to pinpoint exactly how much is make up from Q3 and how much is Q4. Without a doubt, we knew going into Q4 where the orders were coming in and the demand wave that was in front of us. So I don't want to take away from the organic nature of the fourth quarter either..

Got it. And I know you said China grew across both Diagnostics and Life Sciences, can you quantify the growth rate at least ballpark.

Was it mid-single digits? Was it high single digits? And what's your expectation for China in 2016?.

Sure, so I'll talk a little bit about 2015 and then maybe John and Shannon want to chime in on 2016, and you know, Dan we don't talk about sales specifically per region or growth rate per region, what I can tell you is that Diagnostics continues to grow at a really nice double-digit rate in China.

Life Science I think because of a lot of what happened in the beginning of the year, some slowing has been system related. Much of that impacted China. They ended up with a growth rate in China that's in the single digits for the year, which was probably lower than what we would have expected at the beginning of the year.

But both exited 2015 with pretty decent momentum in China.

I don't know if there's anything – 2016 China?.

For Diagnostics, this is John Hertia. China continues to represent good opportunities in immunology and quality control and diabetes. There's still a little bit of a challenge with respect to registration they have, the China FDA. And that's a little bit of a wild card going into 2016.

So we're probably a little conservative on how that could impact us going into the next year..

Yeah, good point..

Got it. And then my final question I guess for you John.

How are you contemplating the potential introduction of the IH 1000 in the U.S.? How is that being contemplated in the guidance for 2016? Could that present potential upside to guidance or is that the kind of launch that would take a little bit longer to fully show-up in numbers?.

So we were targeting three FDA approvals for 2015. We did get two of them in. We got T100 cleared in December and the infinity blood typing system also cleared in December. The FDA did ask for some additional data, the North American gel and the IH 1000, we're in the process of getting that back to them.

And we'll just have to wait for some additional guidance from them. From the time that we get clearance to introduction isn't a very long runway..

And I think in terms of the outlook in the plan, Dan, we don't have the clearance yet, I think we remain very optimistic that we will receive it. But at the time as we've said all along coming into the North American market with the gel technology while quite compelling for the customers.

It is a long sales cycle and not something that happens overnight. So I think we've been very conservative in our expectations all along as to how quickly we would ramp up and take share in the U.S. market, and I think that's true for the 2016 plan as well..

Got it. Thank you..

Thank you. . Our next question comes from the line of Brandon Couillard with Jefferies. Your line is open. Please go ahead..

Thanks. Good afternoon..

Hi, Brandon..

Christine, did you disclose the impact on the operating profit dollar line from currency in the fourth quarter?.

I don't think I said what the....

But do you have it on – at your fingertips? Or do you have it at your fingertips by chance?.

If I can get this stack of papers. Yeah, I think the operating margin was – well, that's year-to-date.

Wait a minute, you want the quarter?.

Yeah. Just the fourth quarter number..

Yeah. I think the operating margin was closer to 11% for the quarter instead of the 10.5% on a currency neutral basis..

Okay. So maybe about – okay, all right. A question on the Propel flow cytometer acquisition.

Could you speak to the financial implications of that? Is that dilutive near-term and sort of what do you see is the competitive differentiation of that system? And do you think there is an opportunity to bundle it with the (29:19) you picked up back in 2012?.

So in terms of – in terms of impact on operating expense, going into 2016 is all included within our outlook.

In terms of market opportunity, you are talking about the new flow cytometer?.

Yeah.

The press release you put out I think last week or two weeks ago?.

Yeah. So I think Shannon's probably a better person to speak about the opportunity and how it fits in our product family..

So, we've been pursuing the cell biology market as an area for growth for Bio-Rad, it fits really closely with our overall approach to doing protein and DNA and RNA analysis at the bench.

Our cell biology portfolio was oriented towards accessing a broader user base which is part of what S3 is about and the cytometer builds on that by offering a user centric cytometer that offers features really aimed at creating an accessible cytometer across multiple levels of users and multiple levels of analytical capabilities..

Christine, any chance you can quantify the near-term drag on the OP line from that?.

It's about $10 million in the fourth quarter..

All right. I think that's all I got. Thanks..

Thank you. And I am showing no further questions at this time. I'd like to turn the call back over to Christine for any closing remarks..

Okay, well thank you everyone for taking the time to join us today. We appreciate your interest and of course, we are available for any follow-up questions that you may have. Bye-bye..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect..