Ronald W. Hutton - Treasurer & Vice President Christine A. Tsingos - Executive Vice President and Chief Financial Officer John Hertia - Executive Vice President & President, Clinical Diagnostics Group Shannon Hall - Executive Vice President & President, Life Science Group John Goetz - Chief Operating Officer & Executive Vice President.

Brandon Couillard - Jefferies LLC Kevin C. Chen - Leerink Partners LLC Jeffrey L. Matthews - RAM Partners LP.

Good day, ladies and gentlemen, and welcome to the Bio-Rad Laboratories, Incorporated Q1 2016 Earnings Conference Call. As a reminder, this conference call is being recorded. I'd now like to turn the conference over to Ron Hutton. You may begin..

Thank you, Karan. 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. With me today are Norman Schwartz, John Goetz, Shannon Hall, President of our Life Science Group; and John Hertia, President of our Diagnostics Group.

Net sales for the first quarter of 2016 were $471.2 million, a slight decrease versus the same period last year's sales of $472.8 million. This decline reflects the continued strong currency headwind, which represented a negative impact on sales of nearly $20 million. On a currency neutral basis, sales increased 3.9%.

During the quarter, we experienced good currency neutral growth across many of our key market and product areas, most notably in our Life Science segment, as well as certain products and markets in our Diagnostics segment.

Sales growth in the quarter was somewhat tempered by continued weakness in the European diagnostic market, as well as challenges in the Eastern European region, both of which posted a decline in currency neutral sales versus last year. Offsetting these tepid regions was solid growth in the U.S., Asia Pacific and selected emerging markets.

The reported gross margin for the first quarter was in line with expectations at 56% compared to 57.1% last year. The current quarter margin is the result of good product mix, partially offset by increased costs.

The higher margin in the first quarter of last year reflected sizable, favorable manufacturing variances during that period, making the first quarter of this year a bit tough to compare.

Amortization expense related to acquisitions recorded in cost of goods sold was higher at $7.2 million, which compares to $6.8 million in the first quarter of last year. The increase in amortization relates to the newly acquired flow cytometry technology for the cell biology market.

SG&A expenses for the first quarter were up slightly at $189.7 million or 40.3% of sales compared to $188.6 million or 39.9% of sales last year. When compared to last year, SG&A expense during the quarter benefited from the strong U.S. dollar. Excluding the currency benefit, SG&A spending increased approximately $7.8 million versus last year.

This increase is substantially the result of higher depreciation and spending on professional services. Total amortization of intangibles recorded in SG&A for the quarter was $1.7 million.

Research and development expense in Q1 was in line with expectations at 10.3% of sales or $48.6 million, which compares to $47.2 million or 10% of sales in the first quarter of last year. The increase in spending relates to our investments in Droplet Digital PCR technology and products for both the research and diagnostic market.

During the quarter, interest and other income was a net expense of $5.5 million compared to $7.7 million of expense in Q1 of last year. This decrease in net expense versus last year is largely related to lower foreign exchange hedging costs. The effective tax rate used during the first quarter was 39%.

This higher than expected rate includes discrete items related to losses in some of our smaller foreign locations, as well as increased reserves for foreign tax audit.

Given the 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 at the top of our previously stated range of around 32%. Net income for the first quarter was $12.3 million and diluted earnings per share for the quarter were $0.42.

Looking to our segments, Life Science sales in the first quarter were an impressive $165.9 million, an increase of 6.4% on a reported basis when compared to last year and growth of nearly 10% on a currency neutral basis.

This growth was driven by continued strong demand for our Droplet Digital PCR products, as well as strong sales of our process chromatography media. We are especially pleased with the continued growth in our process media business, where our products are now specified in 40 FDA approved drugs.

During the quarter, we also experienced good growth of our amplification and Western blotting products. On a geographic basis, Life Science currency neutral sales were particularly strong in Western Europe, China, and the U.S. This growth was partially offset by slower sales in the Eastern European region.

From a strategic standpoint, during the first quarter we made two significant announcements regarding our Life Science Group. The first is our new exclusive partnership with Illumina to develop the most comprehensive next-gen sequencing workflow for single-cell analysis.

And the second is our acquisition of a new high-performance analytical flow cytometer platform. We hope to launch both of these products by the end of the year, which should bode well for continued growth in 2017. Sales of Clinical Diagnostics products were $301.7 million compared to $313.6 million last year, a decrease of 3.8% on a reported basis.

On a currency neutral basis, year-over-year sales were up about 1% for the Diagnostics Group, highlighting a currency headwind to sales of more than $14 million. Additionally, the overall growth rate reflects a delay in some orders as well as continued competitive and pricing pressure, especially in Europe.

During the quarter, we posted excellent growth in the U.S., as well as Japan and the Asia Pacific region. From a product standpoint, sales of quality control, diabetes monitoring and autoimmune testing products continued to grow nicely.

Of particular note, demand for our BioPlex 2200 instrument and assays continues to gain momentum as many customers around the world adopt the system and additional panel.

And finally, during the first quarter, we announced receiving CE IVD marking for the QX200 Droplet Digital PCR System, so that medical practitioners in Europe can use our platform as an aid in clinical decision making. Looking to the balance sheet, as of March 31, total cash and short-term investments were $752.9 million.

Net cash generated from operations during the quarter was a negative $7.4 million compared to a plus $29 million in the year-ago period.

This decrease in cash flow versus last year is the result of lower sales on a reported basis, which includes approximately $14 million of currency headwinds in receivables, higher payments to suppliers and increased employee-related payments associated with various 2015 incentive plan.

Net capital expenditures for the quarter were lower than expected at $25.3 million. Our full year expectation for CapEx remains in the $140 million to $150 million range as we continue to invest in our global ERP system and related infrastructure projects. And finally, depreciation and amortization for the quarter was $34.1 million.

Moving to the outlook, on our last earnings call we shared our thinking for 2016. That is our goals for currency neutral sales growth of 2.5% to 3%, full year gross margins in the 55% range and targeting to hold the operating margin flat at about 8% on a currency neutral basis. We also highlighted the strengthening of the U.S.

dollar against our major currencies could result in a top-line currency headwind of $50 million to $75 million, and thus perhaps flat year-over-year reported sales.

And while we do have some natural hedge with our expense mix, we guided that this sizable headwind could negatively impact our projected currency neutral operating margin by 50 basis points or more for the full year.

As you can see with our first quarter results, the currency impact is still fairly significant, negatively impacting sales by nearly $20 million and operating profit around $4 million. Despite the relatively low profitability posted in the first quarter, we are maintaining our guidance for the base business given at the beginning of the year.

However, I want to reiterate what we have been saying about the numerous challenges to maintaining flat year-over-year operating margins during what will be a year of even greater investment in systems and infrastructure.

As we move through 2016, we will carefully monitor the top-line growth and ongoing investments with a goal of meeting our margin targets. And one final note regarding the outlook. With the acquisition of the new flow cytometer, we expect that amortization expense will increase approximately $700,000 per quarter.

And now we are happy to take your questions..

Thank you. And our first question comes from Brandon Couillard with Jefferies. Your line is open..

Brandon?.

Hey. Thanks. Good afternoon. Yeah.

Can you hear me?.

Yes..

Christine, business, could you break out the effect of, as you saw in growth in Eastern Europe on just the overall segment.

If you back out those two regions, which have been weak for sometime though, sort of what does the base business look like in terms of growth?.

So, you're breaking up a little. Backing out, I think, I heard Eastern Europe and something else..

Yeah.

Just if we back out those two weak markets, how would growth look for this segment sort of excluding those two regions?.

For Diagnostics?.

Yes..

So, Eastern Europe is smaller than some of the other segments. And obviously on a currency neutral basis, backing it out would increase their growth rate. But Western Europe is probably one of the largest regions, if not and I guess, the U.S. is probably larger now than Europe with what's been going on in Europe. So, I don't have a specific growth rate.

But I think that it'd be safe that it would be a couple of points..

I'm not sure if John Hertia's there. But I mean, if you had a point to one market or product vertical where you think you're gaining some share, which it certainly seems like you might be at least in the U.S.

market, what are the kind of top two or three sort of contributors which you think are accounting for the strength?.

Brandon, if I get this right, you are asking for what markets might be strengthening in the U.S.

market?.

Gaining share, yeah..

Yeah. That's right. I'm sorry, if I'm not coming through. Sorry..

We were pretty strong across almost all segments in the U.S. line. We did introduce, I think we'd reported in the last conference call we did get FDA approval for a new diabetes instrument, the D-100 and got approval for a new blood typing instrument, the infinity and those are both contributing.

And as Christine mentioned, BioPlex is doing very well around the world and that certainly is contributing to the U.S. too, especially in the areas of autoimmune, mumps testing and in the expansion of HIV and Vitamin D..

Super.

While I have you, any update you can share with us on the status of the new Bio project?.

The new Bio project continues, continue to make progress and we're anticipating something in the near future..

All right..

Obviously, it's still in development..

Okay. Last one, Christine.

Do you have a revised FX outlook in terms of the revenue impact for the year you can share with us?.

Well, I mean, it all depends on where the currencies go from here. So I think we will stick with the originally anticipated – that kind of $50 million to $75 million. We had $20 million of it on the top line in the first quarter.

I still think that as we get to the second half of the year then we don't have the same headwinds, but a lot of that Brandon is just going to depend on what happens to the rate..

Got you. Okay. Thanks. I will hop back. Thanks..

Thank you. And our next question comes from Dan Leonard with Leerink Partners. Your line is open..

Hi, this is actually Kevin Chen in for Dan today. So my first question is regarding the Life Sciences.

Were there any one-time items or large orders in the quarter and how should we think about the order rate for that business?.

I think the Life Science growth, it's a combination of really good ongoing strength in some of the base business and the Droplet Digital PCR technology. We did have a good quarter for the process media, which can be a lumpy business as customers will buy in bulk.

And so, in any given quarter there could be $3 million to $5 million of an extra order in there, but even that business is starting to smooth out a little now that we have such a broad reach of customers..

Got it. Thanks. And then my follow up would be on China recently expanded their Life Science spending.

I'm just curious what you're hearing on the ground over there and do you perhaps see any incremental tailwinds going forward?.

China Life Science spending trends continues to be pretty robust. I guess that's the way, I would describe it..

Okay. That's good to know. And then, and just lastly, I know you mentioned tax rate was so far in the high-end of the range.

But how would it trend throughout the year? Was it – can you just help us understand that?.

Well, I think you know, we guided to 30% to 32%, and now we've just kind of banked a 39% in terms of the effective tax rate. Obviously, as the year moves on, some of the discrete items get spread on an annualized basis.

So I think for a base rate of being in that 30% to 32% is where we'll probably trend for the year because of the Q1 39%, you know I think the math is going to point more to that, that higher end at 32%, with the caveat of, you know every quarter there could be discrete items that move the rate either up or down..

Okay. That's very helpful. Thank you..

Thank you. And our next question comes from Jeffrey Matthews with RAM Partners. Your line is open..

Thanks. Hi, everybody..

Hey, Jeff..

Christine, you mentioned increase in professional fees as part of the SG&A increase on a currency neutral basis.

Does that relate to the ERP spending, and is that going to increase as you go into your next phase?.

Some of it relates to ERP. Some relates to legal costs. But I think for the ERP, we've talked about spending operating expenses in that $30 million, low $30 million number and I think that's probably still the right number to use.

Remember, a lot of the professional fees with the project are actually capitalized labor, but then there is a lot of kind of side projects, if you will, other systems that are impacted by this that require some professional services as well..

Okay. Thanks. And then, the dollar has been pretty weak lately. And the last time you came out with your here is what the dollar is going do to us this year, I think that was pretty much close to the peak in the dollar.

Are you just not, don't want to change your outlook at this point? You want to see where things go or has there been no movement in the currencies that are really particular to Bio-Rad?.

Well, so no, Jeff, it's a good point and we have seen, since December 31, some weakening in the dollar even against some of our major currencies. But we also have exposure to the Russian ruble and Brazil and some currencies that are still a bit volatile. So, it's kind of a mixed bag for us.

Obviously, if we keep trending this way, then the currency headwinds for the full year should come in lower than what we anticipated at the beginning of the year..

Okay.

And then on the Illumina announcement, how did that come about and when might there be something in the marketplace related to that?.

So, I guess, it came about, this whole area of single cell analysis is something that's of more and more interest to customers and Illumina was looking for a kind of a complete solution for the customers, and I guess they probably approached us. I don't know who made the first move, but got together and looked at what we could do together with that.

And so that's, I guess that's the way it basically came about. The two groups are working pretty closely together and anticipate something coming out around the end of the year..

Okay, great. And then a final one. I'm just curious on the U.S.

It seems like we've had some loosening up in the NIH budget or increases in it and you seem more optimistic in the U.S., is just things generally better here now than they have been?.

Yes. There's certainly, I mean the word sequestration has seemed to have dropped out of everybody's vocabulary and I think that's certainly a big help. In addition to that, I think there is certainly an increased focus.

The government has kind of I would say gotten back on track with the importance and value of this basic science and investing in science in the NIH. And so, I think that's a good trend..

Great. Thanks very much..

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Christine Tsingos for any further remarks..

So, can you just poll one more time?.

Yes. And I'm still showing no further questions..

Okay..

Oh, we do have one more question from Jeffrey Matthews from RAM Partners. Your line is open..

What the heck..

Okay..

Haven't asked the acquisition question in a while. Just wondering what the landscape looks like these days. Money got pretty tight in the first quarter and it seemed to be a good time to be a Bio-Rad seller. I don't know if that's filtered into any of the companies you are looking at.

But, are you optimistic about adding anything to the portfolio this year?.

Yeah. We are optimistic. As you know, it's always hard to say when something might actually happen or what competition for it might be, but we continue to kind of work along that path and I'm certainly hoping that we can do something this year..

Thanks very much. Good luck..

Thank you. And our next question comes from Brandon Couillard from Jefferies. Your line is open..

Thanks. Question for Shannon on the process chromatography business. Christine called out 40 FDA approved products in which you are specified.

Is that a substantially higher number than where you are, let's say 12 months ago?.

Not substantially..

it's certainly higher..

Yeah..

But I think the point is that it continues to grow, and I think the other point is being spec'd in those drugs is a good indicator of a repeatable or continuous business..

Okay. Then one question for John Goetz. I would love to get your views, sort of as we look out over the next, let's call it, 18 months.

What does the time line look like for the ERP deployment in Europe? Kind of when do you expect to turn the first – go-live in the first country and then kind of walk us all the way through the end of next year?.

Okay. We are currently in the, I would say the configuration phase of the project. Right now, our teams are working on it as we speak in Europe. A lot of that is cleaning up data of course, but it's the localization of the system that we've put in place here in the U.S., but having it more applicable to what we're doing in Europe.

We see a go-live timeframe right at the start of second quarter next year. That's our -- it's kind of our hard target and assuming everything goes well, we'll flip the switch at that time. And of course when you do that, you immediately jump on that system with a lot of hyper care as you pull yourself through the mess of a go live.

So then we'll see probably another couple of quarters, maybe even three quarters of stabilization over there. It's a pretty complicated roll out and then I think we're probably going to take subsequent roll outs in more bite size pieces as we maybe complete the rest of our European deployment.

There is some countries that are excluded in this scope, and then we'll move onto Asia in the subsequent quarters and kind of go from there.

But, by the time we finish this deployment that we plan for Europe, which is a go-live in that second quarter timeframe next year, we'll have captured the lion share of our manufacturing plants and top-line sales. So, that's – we're really encouraged by that..

Super. Thank you..

Thank you. And I'm showing no further questions..

Okay. Great. Well, thank you as always for your interest in Bio-Rad and taking the time to join us today. Bye-bye..

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day..