Ronald W. Hutton - Bio-Rad Laboratories, Inc. Christine A. Tsingos - Bio-Rad Laboratories, Inc. Norman D. Schwartz - Bio-Rad Laboratories, Inc. Annette Tumolo - Bio-Rad Laboratories, Inc. John Goetz - Bio-Rad Laboratories, Inc..

Brandon Couillard - Jefferies LLC Dan Leonard - Deutsche Bank Securities, Inc. David Westenberg - C.L. King & Associates, Inc. Jeffrey L. Matthews - RAM Partners LP.

Good day, ladies and gentlemen, and welcome to the Bio-Rad Laboratories Incorporated Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Mr. Ron Hutton, Vice President and Treasurer. Sir, you may begin..

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, 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 it 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 2016 as well as provide some insight into our thinking for 2017.

With me today are Norman Schwartz, John Goetz, Shannon Hall, President of our Life Science Group, John Hertia, President of our Diagnostics Group; and Annette Tumolo, Executive Vice President of our Digital Biology Group.

As some of you may already know, Annette oversees our Droplet Digital businesses and will now also be providing leadership over our new RainDance operations. Let's start with a review of the quarterly results. Net sales for the fourth quarter of fiscal 2016 were $571.5 million, up slightly when compared to the year ago period sales of $570.6 million.

On a currency-neutral basis, quarterly sales growth was approximately 1%. As we cautioned on our last call, sales of Life Science products were down year-over-year, primarily as a result of a tough compare to the fourth quarter of 2015.

This tough compare is related to more than $10 million of backlog that was pushed into the year ago period as well as in sales of process media products, which were also strong in Q4 of last year. Partially offsetting this tough compare for the Life Science segment were continued strong sales of our Droplet Digital PCR instruments and consumables.

Our Clinical Diagnostics Group continued to post strong top line growth during the fourth quarter, particularly in sales of our diabetes monitoring and auto immune testing products, as well as quality controls. The consolidated gross margin for the quarter was better than expectations at 55% and compares to last year's gross margin of 54.1%.

The improvement in gross margin is attributable to our Diagnostics Group and largely the result of improved product mix, overhead absorption and lower amortization of intangibles. During the fourth quarter, we recorded a total of approximately $4.5 million in cost of goods sold for the non-cash purchase accounting expense related to acquisition.

This compares to $6.6 million of amortization expense in the year ago period. SG&A expense for the fourth quarter was $220 million or 38.5% of sales compared to $193.1 million or 33.9% of sales last year.

This higher expense is driven by increased reserves for legal settlements of $10.9 million, plus $2.1 million of contingent consideration expense related to our new flow cytometer, and increased ERP project-related costs, which were approximately $4 million higher in the quarter versus the same period last year.

Also remember when comparing to last year, the fourth quarter of 2015 included a contingent consideration benefit of $4.9 million. If we exclude these $22 million of year-over-year changes in expense, SG&A as a percent of revenue for the fourth quarter of this year would have been 34.7%.

And finally, in SG&A, amortization of intangibles related to prior acquisition was approximately $1.7 million for the quarter, up slightly from the year ago period. Research and development expense in Q4 was 10.1% of sales or $57.5 million versus $55.9 million last year.

This increase in R&D spending, when compared to last year, primarily reflects a $7 million milestone payment recorded in our Life Sciences Group, related to the purchase of the new flow cytometer for the cell biology market.

Another driver of the increased R&D spend relates to our ongoing investment in new applications for our Droplet Digital PCR technology. During the fourth quarter, we impaired the goodwill and in-process research and development associated with the acquisition of GnuBIO for a total of $59.9 million.

When we acquired GnuBIO in 2014, the technology was very early stage. As it has taken us longer to bring these products to market than originally estimated, the value of the expected future cash flows has changed, and thus the appropriate accounting is for us to write down the original investment.

Nonetheless, we continue to believe that the customer value proposition for a targeted sample-to-answer sequencer remains intact, and we will move forward with completing development. Our plan is to launch a new product for the clinical research market late this year.

Obviously, the inclusion of several unusual charges during the fourth quarter negatively impacted our operating margin. If we exclude the $70.8 million for legal-related reserves and the impairment charge, the operating margin for the fourth quarter would have been approximately 8%.

Interest and other for the quarter was a net expense of $5 million compared to $5.3 million last year. The effective tax rate used in the fourth quarter was lower than expected at 27%, primarily the result of the mix of earnings in lower tax jurisdictions, as well as benefit related to the repatriation of foreign earnings.

When comparing to the year ago period, remember that last year's rate benefited significantly from sizable foreign repatriations as well as the reinstatment of the federal R&D tax credit for 2015.

Driven substantially by the impairment of the GnuBIO assets, reported net income for the fourth quarter was a loss of $20.6 million or minus $0.70 per share on a diluted basis compared to $49.5 million last year or $1.68 per share.

Excluding the impairment and legal related charges, we estimate that earnings per share for the quarter would have been $0.98. And now for certain segment information. Life Science Group reported sales for the fourth quarter were $206.8 million. This represents a decline of 5.2% versus last year or minus 4.3% on a currency-neutral basis.

As I mentioned earlier, these quarterly sales reflect a tough to compare with Q4 of 2015, especially in light of the backlog catch-up and the timing of sales of processed media products.

The headwinds were partially offset by continued strong performance for our Droplet Digital PCR product family as well as strong sales of our food safety product line.

Throughout the year we made a concerted effort to smooth out sales of our traditional protein and gene expression product, and that certainly impacted our ability to post growth in the fourth quarter. On a geographic basis, currency-neutral sales in Q4 declined in our largest regions for Life Science.

In North America and China, primarily related to the system transition in 2015, and our efforts to smooth out the revenue flow, and in Europe, where we experienced some slowness.

Our Clinical Diagnostic Group achieved good sales for the quarter of $360.8 million compared to $348.6 million last year, an increase of 3.5% on a reported basis and growth of 4% currency neutral. These sales were led by continued strong performance in the quality controls and diabetes product lines as well as solid growth for BioPlex 2200 revenue.

On a geographic view, diagnostic currency neutral sales for the quarter increased most notably in China, Asia-Pacific, North America and Japan, while sales in Europe continued to decline. Looking at the full year results, we are pleased to report annual revenues of $2.068 billion.

While this represents an increase of 2.4% versus last year on a reported basis, on a currency-neutral basis, sales for the year grew 4%. This difference in growth rate reflects a currency headwind to sales of more than $31 million for the full year.

Despite the tepid revenue in the fourth quarter, our Life Science Group posted all-time record annual sales of $730.7 million, an increase of 5.1% versus 2015 on a reported basis, and growth of an impressive 6.5% currency neutral.

These record sales reflect annual growth in every region and every product group for Life Science, primarily fueled by continued strong sales of our Droplet Digital PCR instruments and consumables and processed media. We also saw a good annual growth in our gene expression, Western Blot reagent and food safety product line.

From a geographic view, sales in North America, China, and Asia Pacific were the biggest contributors to year-over-year growth for the Life Science Group.

For the year, clinical diagnostic sales were $1.323 billion, an increase of 1% on a reported basis, and growth of 2.6% on a currency-neutral basis, representing a currency headwind of nearly $22 million for the full year. This growth was fueled by continued momentum in quality control, blood typing and diabetes monitoring products.

Also important to highlight are sales of our BioPlex 2200 instrument and panel, which grew double-digits during 2016 as we've placed a record number of new instruments at reference labs and hospitals around the world. We now offer more than 60 tests on the BioPlex 2200 and the installed base exceeds 400 instruments.

On a geographical view, sales in North America, China and Asia Pacific were the biggest contributors to year-over-year currency-neutral growth for the Diagnostics Group. Total company gross margins for the full year of 2016 were in line with our annual guidance at 55% and compares to 55.5% in 2015.

The decrease in margin versus last year is largely the result of approximately $2 million of restructuring charges for Europe, as well as higher service costs and changes in product mix. Also important to note, total amortization of intangibles and purchase accounting recorded in cost of goods sold for 2016 was $26.1 million.

This compares to $27.7 million last year. With a number of out of the ordinary expenses booked during the year, SG&A expense as a percent of sales was 39.5% for 2016 or $816.7 million and compares to $762 million in 2015.

Excluding more than $37 million associated with the restructuring in Europe, legal settlements and changes in contingent consideration, SG&A as a percent of sales was approximately 37.7%. And finally, in SG&A, total expense for acquisition-related amortization was $6.9 million for the full year.

Research and development expense in 2016 was $206 million or 10% of sales and compares to $193 million or 9.6% of sales last year.

This increase is substantially in our Life Science Group as we continue to invest heavily in new products for the cell biology market, including our new flow cytometer, which is expected to launch later this year, as well as increased investment in digital biology applications, such as liquid biopsy.

Looking to 2017, R&D expenses as a percentage of sales will likely stay at that 9% to 10% level as we move a number of projects through the product development pipeline. The full year reported operating margin was significantly negatively impacted by the various accounting charges taken throughout the year.

If we exclude the non-cash $95 million of expense related to the European restructuring, legal-related settlements and impairments of acquired assets, the operating margin for the full year would be approximately 7%. The effective tax rate for full year 2016 was in line with our guidance of 32.3%.

For 2017, we expect the effective tax rate, excluding any discrete items that may occur, to be in the 30% to 32%. Reported net income for the full year was $28.1 million with fully diluted earnings per share for the year of $0.95.

As we have discussed, 2016 contained a number of non-cash or non-recurring expenses and we have highlighted $95 million of those charges. Excluding that amount, we estimate that earnings per share for the full year 2016 would have been $3.24.

If we exclude the non-cash amortization of intangibles and revaluation of contingent consideration booked during the year, earnings per share would be approximately $3.99. For 2016, Bio-Rad's balance sheet remains strong. As of December 31, total cash and short-term investments were $844 million compared to $790 million at the end of last year.

Net cash generated from operations during the fourth quarter was substantially higher at $95 million and $216.4 million for the full year 2016. This compares to net cash generated from operations in 2015 of $186 million. The year-over-year increase in cash flow is substantially related to the higher sales and improvement in collections.

EBITDA for 2016, adjusted for the impairment charges, was $269 million for the full year and $72 million in the fourth quarter. Net capital expenditures for the quarter were higher at $45 million as we continue to invest heavily in our third deployment of SAP as well as our new operating footprint in Europe.

Total CapEx was $141 million for the full year, slightly ahead of the $130 million to $140 million range estimated on our last call. Looking to 2017, we estimate that CapEx spending will decrease to the $125 million to $135 million range as we complete our last major deployment of SAP and other foundational projects in Europe.

And finally, depreciation and amortization for the quarter was $35.1 million and $142.9 million for the full year. Moving to our outlook for 2017, let's start with the outlook for the base business. Looking to 2017, 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 research in our major markets seem to be holding steady. As such, we are targeting Life Science growth to be in the 4.5% 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 blood typing and diabetes monitoring.

During 2016, we placed a record number of new instruments in laboratories around the world, which bodes well for higher margin growth over the next few years.

Partially offsetting this expected growth, we continue to face some challenges in the diagnostics market, including price pressure in government tenders and lab consolidation, especially in Europe. Even with that in mind, we are targeting the Diagnostics' currency-neutral sales growth rate to be higher than 2016. And that is in the 3% to 3.5% range.

Overall, the combined result of the opportunities across both businesses leads us to the expectation for annual sales growth in 2017 of around 4% on an organic basis, which is equal to the accelerated growth we experienced in 2016.

With regard to margins, we are hoping to maintain our gross margin at 55% for the full year despite increased costs projected in the first half of the year associated with the build-out of our new warehouse in Europe and other redundant expenses in advance of the ERP system go live.

In thinking about the operating margin for 2017, we continue to see sizable investment in the pipeline as we complete the build-out of a new operating footprint in Europe and go live with our third deployment of SAP in April.

During the first half of the year, we will likely see expenses in the region increase sizably for both the ERP projects and the operating redundancy and then start to reduce late in the year. Even with that in mind, our currency-neutral operating margin goal for 2017 is 7% for the full year. On a reported basis, the strong U.S.

dollar will likely continue to have a negative impact on our reported results for 2017. As many of you know, Bio-Rad is a very global company in terms of both sales and operations and currency can have a significant impact on our reported results. More than 60% 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, our outlook for currency-neutral sales growth in 2017 is around 4%.

However, using current exchange rates, currency could actually result in a revenue headwind of $20 million to $50 million, which in turn result in very low-single digit growth on a reported basis.

And while we do have some natural hedge with the non-dollar denominated expenses, this currency headwind could impact our expected operating margin by as much as 50 basis points in our reported numbers. As you know, we have recently completed the acquisition of RainDance Technologies.

We are excited to add RainDance to the Bio-Rad family and further strengthen our current and future offering of droplet-based products for both the research and clinical market.

With regard to the 2017 outlook that I just discussed, the addition of RainDance could add about $20 million in revenue and thus drive our currency-neutral sales growth to 5% for the full year.

Regarding the impact to profitability, our best estimate at this time is that the consolidation of RainDance could negatively impact operating income by $7 million to $10 million in 2017.

The majority of this projected impact is related to purchase accounting and one-time integration costs, but nonetheless could bring our projected operating margin to be below 7% for the year. Having said that, the historical head count and spend at RainDance has already been significantly reduced and our goal is to reach accretion within 18 months.

And now, I'll turn the call over to Norman for some final remarks..

Okay. Thank you, Christine. As we wrap this up, I guess I just wanted to say that despite a relatively flat outlook for 2017 profit margins, we do remain highly committed to focusing on ways to create greater operating leverage and cash flow in the years to come.

We are excited to finally be seeing the light at the end of the tunnel after years of substantial investment in new technologies and markets, a global ERP system, and a new consolidating operating model for our European operations. It's – again, we feel like it's kind of the light at the end of the tunnel.

It has been a lot of money and many years of hard work in the making and we do appreciate your patience. Our long-term goal of accelerating top line growth while significantly increasing our operating margin to the mid-teens or higher is in sight and we are certainly excited about delivering this increased value to our shareholders..

So with that, we're happy to take your questions..

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

Hey. Thanks. Good afternoon..

Hey, Brandon..

Well, Christine, I really appreciate all the detailed color on all the puts and takes there.

As we think about the operating margin outlook for this year, given that a good portion of the ERP expenses will come onto the P&L from capitalized, can you quantify what that incremental number alone is in 2017 versus 2016?.

So I think that the spending was already higher in 2016 and so incrementally as we look to 2017, and this is assuming a fairly quick stabilization period, I think the incremental spend is only a few million dollars, $3 million to $5 million. Obviously, that changes quite a bit if the team stays in stabilization mode longer..

Okay. Super.

And then, I'm not sure if Norman or Annette or Shannon would be best to address this, but as we think about the RainDance deal, could you sort of educate us on the rationale for the acquisition? How do you expect to integrate the two Droplet Digital platforms and what does it really add to your capabilities in that area?.

Okay. This is Annette. So, RainDance has Droplet Digital PCR products that are very complementary to the products we have in that space today. So it strengthens our position in Digital PCR, and they have expertise and products in next-generation sequencing sample prep that will really accelerate our move into that market.

Additionally, they have foundational intellectual property that I believe will give us maximum flexibility as we move into markets adjacent to Digital PCR that are droplet-based..

Okay. Super. Maybe one for Shannon, any color you can give us on how the new Illumina single-cell partnership rollout is going in terms of customer feedback or demand? And maybe walk us through sort of the economics of that deal through instrument ASPs and kind of maybe instrument pull-through metrics, whatever you can would be helpful..

Brandon, this is Annette. So we just launched the product on February 10 and I have – we've sold some systems so far. I've gotten feedback that the interaction in the field between Bio-Rad and Illumina is going very well and the cooperation and customer-facing co-commercialization teams are going very, very smoothly.

So we're pretty optimistic about the outlook for the product for the year..

And Brandon, regarding the impact on the 2017 outlook and the P&L, there are two sources of revenue from this partnership for Bio-Rad. One is the ability for us to sell the instrument that we develop for single-cell both in the bundle as well as – or for new customers as well as to their installed base.

And then, the second revenue stream is in the form of royalty that come to us from Illumina. We don't disclose to that level of detail, as you well know, but I can tell you that we've been fairly conservative in our expectation. In 2017, I know that Illumina is very excited and I hope they're spot on.

I would love to be proven wrong, but we've taken a fairly conservative approach in terms of what we're anticipating for revenue in 2017..

Great.

And perhaps one for Norm, could you sort of educate us on what the budget process was like coming into 2017, how it might have differed from prior years and to the extent that that process has given you better visibility or granularity into exactly where all the cost opportunities are once the ERP go-live is finished?.

Yes, Brandon, this is John. I'll take that. Yes, we've been thinking about 2017 for, let's say, more than the last couple of months, I'll put it that way. We've organized the approach to look at improvements across the board, starting in our supply chain area, and we have very specific targeted projects that we've got in mind there.

We've also taken a very detailed look at our OpEx spending and we've really tied that right down to location, head count, and the needs in which we see ourselves in.

So, largely, as we think about 2017, for me and the organization, it's to get through this go-live in Europe, which we've got scheduled for early April, get that stabilized in three months' time, and then begin the process of shedding costs associated with that and moving onto the next smaller deployments going forward.

So those for me are the really key aspects of it. And then, with respect to top line planning, accelerating growth is really part and parcel to getting our ship righted here. And we're pretty optimistic, I think as Christine alluded to, about the coming periods..

Super. Thanks so much..

Thank you. And our next question comes from the line of Dan Leonard of Deutsche Bank. Your line is now open..

Great. Thank you. And I also appreciate all the detail in the prepared remarks, so thanks for that.

My first question, on the path to, Norman, as you said, mid-teens or higher operating margin, could you give us at least in broad brush strokes more detail on the components and the timing? Because if you assume mid-teens operating margin on your 2016 revenue base, that is $165 million in additional operating profit.

I'm just trying to track down where all that would come from..

So I think it comes from a couple of places. Certainly, the sales growth, and I think as John said, we set the course for sales growth not only for 2017 but for the next few years. And that's, of course, one of the principal drivers.

And then, as we go down the balance sheet, I think as we've called out a number of times, our SG&A is on the high side compared to our peers, and we really circled in on very tight control over SG&A for the next few years to help drive those margins.

So, as we go forward and see, and are planning now and working on how we harvest the benefits of the SAP system, and some of these other investments that we've made, I think that's really where it all comes from..

Okay. That's helpful.

And secondly on the smoothing efforts in the Life Science business, can you elaborate further – I think this is a question for John – really what that entailed and will we see any residual impact in 2017?.

Yes. If you remember last year, we had a very good strong fourth quarter, and that's great, but it drove our manufacturing plants wild with maximum volumes through the plant and shipping challenges like we've never had before.

So we asked our supply chain folks to get together with our commercial guys and to say can we figure out how to kind of smooth this a little bit so that we don't have such a huge number in the fourth quarter.

Maybe some customers might actually want product in third quarter or could we at least move some of our manufacturing a little earlier so we don't run it all to the hilt over the holidays like we did in 2015. So that's what that was about..

Yes. And I think in terms of how it plays out, Dan, and you can see this in how 2016 rolled out, there's going to naturally be some tougher versus easier to compare periods as we look to 2017, especially for Life Science, and we think about that strong double-digit growth they had in Q3, et cetera.

But, overall, I think on an annual basis, we're still looking for pretty solid growth..

Okay, and then final question for you, Christine. Have you taken a look at some of the proposed plans for corporate tax reform and what impact it might have on Bio-Rad? And I think the part I could use the most help with is the potential border tax adjustment.

Given you have all these costs in Europe, it's unclear whether you're a net importer or exporter..

Okay. So I'll take that one first. We are a net exporter. It is true that we have a sizable footprint in Europe, but we also have a sizable footprint here in the United States, and on both sides of the business, but especially on the Life Science side, we are a net exporter.

Regards to some of the other plans, we don't know until we know, until these plans become real, but whether it's what the Republican Party is talking about or Trump talks about from time to time, I think either way you slice it, Dan, we're probably going to be a beneficiary of that in terms of a lower tax rate in the U.S.

And then, on top of that, we will be able to turn on a lower tax rate in Europe with the turning on of SAP in Europe. So if we're really lucky, we'll get a benefit in Europe as well as a benefit of whatever they do here in the U.S..

Okay. Thank you..

Thank you. And our next question comes from the line of David Westenberg of C.L. King. Your line is now open..

Hi. Thanks for taking my question.

So can you talk about the expectation going into the April go-live? Is there anything that's come up in the last couple months or anything that might be – any hurdle that you've encountered recently that might be a challenge to implementation?.

So maybe I'll take that. This is Norman. Obviously, these things are hard and I think this is certainly our biggest, most complicated deployment. I think we've spent a lot of time thinking about what we need to prepare and getting prepared.

You can never figure out everything down to the last detail, but I guess I'm feeling pretty confident that we are as well prepared as we can be. We've got people on the ground and we've got extra resources at the ready to deal with whatever issues come up, and I think we're as well prepared as we can be..

And I would agree with that. We've tried to take advantage of lessons learned. We've created a buddy system to send our power users based here in the U.S. to be there on site as we go live and transition over the week shortly after going live.

But this is really complex, because, remember, we're not just turning on some new system in Europe, we have totally changed how we run our business, as you've heard me say, do business with ourselves in Europe and change that operating model with the advent of a European headquarters and the advent of a shared service center, et cetera.

So there is a lot of change we have to manage. To kind of Brandon's earlier question, the biggest risk to our outlook for 2017 really surrounds our ability to get through this transition fairly successfully. With that being said, I agree with Norman, and I think we're all feeling pretty good.

There's been a lot of people paying attention to this and working on it and are going to be at the ready come early April when we turn it on..

Got you. Thank you. That's very helpful. And just a follow-on to that question, I think earlier in the call you mentioned something about sort of three months to stabilize.

What's the puts and takes that might affect that three months to, I don't know, be four months or two months or whatnot?.

Yes. And so then I just want to clarify what that means in terms of stabilization. I think what John was talking about is the team that works on this project would like to move on to the next implementation.

And we talk about this being our last major implementation and it is, because with this deployment, we will virtually have almost all of our manufacturing worldwide on SAP and what's left are sales operations that will roll out over time.

But we would want to get the team quickly not needed anymore for the transition so that they can move on to the next implementation, which under the accounting terms means all that labor is capitalized instead of expensed. And that's kind of the risk to the P&L and the assumptions in the P&L.

In terms of overall business stabilization, I think we've said in the past that that really takes almost a full year before people get really proficient of using SAP and taking advantage of SAP.

And so, some of these redundancies that we have in head count and what we call backfill in the business, et cetera, they'll stay throughout much of 2017 to make sure that not only is the system working well, but people know how to take advantage of it.

And we've talked about when we really start to see the benefit coming back to us is after that one-year anniversary or the second half of 2018..

That was very helpful. Thank you so much. And I guess just last one on GnuBIO. Again, it's a little puts and takes and timing thing here.

What could affect that end of the year launch date on that GnuBIO system?.

This is Annette. So we acquired early-stage technology and the team has made tremendous progress towards reducing risk in commercialization. We have a few more hurdles that we have to do to finish development and we need to get in a full-on beta test. And so predicting the exact month for when we're going to end could be a little tricky..

Late in the year..

Yes. Oh, yes..

Okay. Perfect. Late in the year. All right. Thank you very much..

Thank you. And our next question comes from a follow-up from the line of Brandon Couillard of Jefferies. Your line is now open..

Thanks. Just one follow-up for you, Christine. Could you quantify the actual dollars related to ERP that was in the P&L in 2016? And I know you already said that that's $3 million to $5 million higher in 2017. Just curious if you could give us what the base actual dollar number is..

For the project?.

Yeah..

So, when we think about the project, there's spend directly associated with the project and then there's kind of this ancillary spend where we have a lot of temporary help that's backfilled while our good people are working on the project.

And where we've been running, and as you know, is kind of that $25 million to $30 million a year for the project itself and then maybe an extra $10 million or so in the related costs, if you will. That doesn't include depreciation, but really more about this backfill.

So if you add those two together, we're high 30s for 2016 and 2017 is pretty similar and then should go down from there. And again, the reason is pretty similar is we're anticipating a fair amount of health in the stabilization and continuing to need to backfill as we go through that period..

Great. Thank you..

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

Hi. Thanks.

Brandon just asked my question, but to follow up on it, does the high $30 million go to zero over time, or does it go to just a lower number?.

So in terms of cash spend, I don't think it goes to zero. There's an ongoing support cost. SAP is a thing – we obviously have to support it. We'll be de-commissioning all these old systems. So I don't think it goes to zero. And on a reported basis, Jeff, we're taking on a fair amount of depreciation..

Right..

And as I look over the long term, that depreciation is probably going to run around $25 million a year. In 2016, it was already up to $15 million.

But on a cash basis, certainly it changes quite a bit, and the spend on the project, both in terms of cash running through the P&L and capital, goes down pretty significantly as we look out to 2018 and beyond, but there'll always be some sort of cost associated with this.

And again, we're going to take the rest of the deployments in kind of measured approaches based on where we get the greatest return in each of these sales locations..

Right. Thanks.

And did you give a CapEx and depreciation estimate for 2017?.

Probably not a depreciation estimate, although, as I just kind of hinted at, I think that depreciation associated with the SAP system increases $8 million to $10 million in 2017. For CapEx, what I said was $125 million to $135 million, and that's versus $141 million that we spent in 2016. Remember in our CapEx, there's three major components.

There's all the new investments and that's what's been driving sizable spend the last few years and it's primarily around this SAP system. There's always some level of maintenance CapEx.

And then, within our CapEx, traditionally about a third of it has been related to reagent rental and these instruments for the Diagnostic business that we are placing in hospitals and labs all over the world.

With a lot of new instruments that are just coming on for Diagnostics, either we launched them late in 2016 or they're coming even more instruments in 2017, reagent rental in CapEx could go up.

And so, you're not seeing as big of a drop from $141 million to this new range of $125 million to $135 million as maybe could have been, but the mix is definitely changing..

Got it. Terrific. Thanks very much..

You're welcome..

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

You want to poll one more time..

And I'm showing no further questions..

Okay. That's great. Well, thank you, everyone, for your interest and spending time with us today. And I reiterate what Norman said. We really appreciate your patience and support, and hope you share our excitement for the future. Bye-bye..

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