Good day, ladies and gentlemen, and welcome to your Q4 2010 Life Technologies Corporation Earnings Conference Call. [Operator Instructions] And now I would like to introduce your host for today, Eileen Pattinson.

Thank you, operator, and good afternoon, everyone. Welcome to Life Technologies' fourth quarter and full year 2010 earnings conference call. Joining me on the call today are Greg Lucier, our Chairman and CEO; and David Hoffmeister, Chief Financial Officer. In addition, Mark Stevenson, President and Chief Operating Officer will be available during the Q&A portion of the call. If you haven't received a copy of today's press release, you may obtain one from our website at lifetechnologies.com. I want to remind our listeners that our discussion today will include forward-looking statements, including, but not limited to, statements about future expectations, plans and prospects for the company. We believe these statements are based on reasonable assumptions, but actual results may differ materially from those indicated. It is our intent that these forward-looking statements be protected under the Safe Harbor created by the Private Securities Litigation Reform Act of 1995. Additionally, we'll be discussing GAAP and non-GAAP measures. A full reconciliation of the non-GAAP measures to GAAP can be found in today's press release or on our website. I'll now hand the call over to Greg Lucier.

Thanks, Eileen, and thank you all for joining us. I hope you've had a chance to review the press release we put out this afternoon. We had a terrific fourth quarter, with 5% organic revenue growth and $0.90 of earnings per share, rounding out a record year for Life Technologies. For the full year, we achieved 7% organic growth and 200 basis points of operating margin expansion, generating over $1 billion in operating profit. Free cash flow for the year was $614 million. Excluding the impact of H1N1 and the large Japanese Police deal, organic revenue growth was, for the fourth quarter and the full year, was 9%. Earnings per share grew 17% in 2010, the result of a lot of hard work and focused execution from our teams around the world. Throughout the year, these teams have focused on building shareholder value through excellence in four key areas that ultimately drive our strong financial performance. These areas are product innovation, geographic reach, market expansion and operational excellence. I'll spend a little time highlighting what we have done in each of these areas over the course of the last year. In 2010, we launched a multitude of new innovative products that are designed to accelerate the pace of discovery by making research simpler, faster and more accurate. The successes of our Bioproduction business throughout the year is a notable example of how new products are driving top line growth. In 2010, this business grew more than 20%, driven in large part by the success of several newly launched products, including biological detection for the rapid identification of common contaminants in biomanufacturing, and optimized animal origin free media for CHO cells, the most commonly used cell industrial production of protein-based therapeutics. Key product launches in other areas such as sample prep,…

Thanks, Greg. This quarter revenue grew 7% to $934 million. Currency had no impact on reported revenue growth, while acquisitions contributed an additional two points. Excluding the impact from currency, acquisitions and divestitures, revenue grew 5% and it grew 9% also excluding the impact of H1N1 and the Japanese Police deal. Organic growth by region in the quarter was as follows: the Americas grew 7%; Europe, 3%; Asia Pacific, 12%; Japan, declined 4%. Excluding the impact of H1N1 and the Japanese Police order: the Americas grew 10%; Europe, 5%; Asia Pacific, 17%; and Japan grew 10%. Similar to prior quarters, stimulus-related revenues for the fourth quarter were approximately $10 million. Genetic Systems had revenues of $246 million, representing 11% organic growth. Overall sales of CE instruments and consumables grew 4% for the quarter, driven by mid-teens growth in consumables and accelerating demand for our 3500 Genetic Analyzer. Growth in this business, particularly instruments, was negatively impacted by a difficult year-over-year comparison resulting from last year's Japanese Police order. Excluding the impact of this order, overall sales of CE instruments and consumables grew 10% for the quarter and 8% for the full year. In addition, the Next Generation Sequencing business demonstrated strong double-digit growth in the quarter. For the full year, our SOLiD instruments and consumables continued to gain share, growing 50% year-over-year. Sales of the recently launched Personal Genome Machine are off to a good start and we anticipate that Ion Torrent-related revenue will be a significant contributor to growth in the second half of 2011. Molecular Biology Systems had revenues of $445 million in the quarter, representing a decline of 1% in organic growth. However, excluding H1N1-related revenue, organic growth was approximately 4% for the quarter and 6% for the full year. As Greg mentioned earlier, acceleration in demand…

Thank you, David. John, we're now ready for the Q&A portion of the call.

[Operator Instructions] And we'll take our first question coming from Quintin Lai. [Robert W. Baird]

First question, last quarter you talked about ERP installation in Asia and it looks like that things rebounded growth-wise there. Any update on that and other initiatives that you have planned for that region for growth in 2011?

That's right, Quintin. So our Asia Pacific business overall rebounded nicely as we predicted it would once we got past this ERP implementation. In terms of further investments we've made in that region, there have been several. First, as we noted in the script, we acquired Labindia, which gives us significant warehousing, technical support, sales force capability on the Applied Biosystems side of the business. We also completed the development of a very large logistics center in Singapore to house tens of thousands of products to serve the region. And we also started on building several warehouses across China in the coastal cities to further expand the footprint we already had. We had outgrown the infrastructure we had put in place a few years earlier. So those are some notable achievements across the Asia Pacific region.

And then Greg, as you look out to 2011 and with the guidance, are you expecting kind of a continuation of the end markets that you have now or especially -- we're getting a lot of questions on what are you thinking, what are your thoughts on the academic side and potential NIH funding? Any color would be helpful.

In our estimate, we have presumed a fairly stable funding environment. We continue to see good strength in the biotech/pharma sector across the world. We think academic funding will be basically flattish versus last year, and we're not counting on any improvement in the NIH in our forecast. We see continued robust demand in the Asia Pacific region and Latin America and the Middle East. And so those factors are what drive our overall forecast for revenue in 2011.

And our next question is coming from Doug Schenkel. [Cowen and Company]

One clarifying question on Q4. Maybe folks just didn't have it modeled right, but if I remember correctly, I think you guys guided operating margin expectations to 150 basis point year-over-year increase in Q4. If I'm remembering correctly, you clearly came up a bit short of this, which seems attributable to weaker than expected gross margin, at least given relative to work incentives was. Did you come up short here? And if so could you talk through some of the reasons why the pricing? Is it currency? Mix? Royalty? What happened to gross margin line?

So this is Eileen. We had a couple of things impacting in the quarter. Nothing unusual. We had a higher mix of bioproduction than we expected in the quarter and that brings the margins down slightly. We also had, as expected, sequential reduction in pricing, which is typical in the fourth quarter of every year. And we had sequential reduction I believe in royalties as well, which would have also brought down margins.

To answer your question Doug, I think it was in line with what we expected. It wasn't anything unusual, and similar to what we've experienced in prior years.

So that gross margin again that -- you guided gross margin, I think to decline sequentially, which clearly it did. Although I don't think people were modeling that it would be down quite this much. If that was in line with expectation and then -- I think the operating line was a little bit lower, is that not correct?

We did make some investments in R&D in the quarter as well in things like Attune, Ion Torrent and we also invested in Bioproduction, which Greg mentioned earlier.

And then in terms of the guidance, mid-single digit growth is not a surprise especially given you've talked about that before. That being said, how should folks view this, I mean, first off, what does mid-single digit mean? I mean, is that 4% to 6%? And given you guys did 9% organic growth in 2010, excluding H1N1, should folks be -- would you be surprised that people are disappointed by this, given it does imply a moderation which seems a bit surprising given your ability to get price, predictable volume and the growth in emerging markets?

I think mid-single digits is you pick your number, but I would say, it's somewhere 4% to 6%. And we said we would expect something around 1% or so from acquisitions over the course of the year. And I think that, that is actually in line with what we experienced this year. Remember, you have to adjust for comps as well. So there are a couple of things in our growth rate this year that make comparisons for next year slightly more challenging. We talked about the first quarter where we had exceptional growth last year. And we're expecting lower growth in the first quarter this year as a result. Second, Bioproduction business grew at 20-plus percent. That's phenomenal performance for that business this year. And we think that, that business is going to continue to perform as it has over any two or three year period in the high-single digits. But obviously, we're not counting on it growing 20-plus percent next year, so that's a factor. And then the third thing is royalty revenue. Royalty revenue, we're projecting will fall another $20 million next year. Now this year, we've been successful with our licensing group in completely offsetting the drop in -- expected drop in royalties. But at this point in the year, we're not counting on that for next year.

And our next question is coming from Tycho Peterson. [JPMorgan]

Given that a lot of us nowadays are BP [ph], I'm just wondering stepping back as we think about your sequencing business. In the past, you've provided some thoughts on your overall level of spend. Are you going to talk a little bit about kind of your overall level of spend? And then as we think about Ion Torrent talk a little bit more maybe about a go-to-market strategy, sounds like maybe your shifting some resources from SOLiD over to Ion Torrent? If you can talk a little bit about integration and implement development plans that'd be helpful.

Sure, Tycho. The overall spend is about the same just maybe slightly elevated. And as you stated, there has been a shift in our resources as the 5500 SOLiD machine is now basically being launched. We have a very large development team that has been able to augment the Ion Torrent team and really accelerate now that development. So I think that's the way you can consider our investment and how we shifted it.

And then if we think about the capillary business, can you talk to your expectations? I mean, you guys obviously, had more resilience there, better than I think people originally anticipated there in next gen. Can you just talk to how sustainable some of those underlying trends are?

Yes. I think the best way to describe the CE business is to bifurcate the end market for it. So on the applied markets side, forensics, food testing and the like, that's a very sticky business. It is a very well-received product early now in the life cycle, and so we anticipate very good demand for CE instruments on the applied markets side for some time to come. On the research side, where I think everybody has been pleasantly surprised, that product has continued to have an uptake and I think it's primarily due that it is the gold standard in sequencing. So as more and more sequencing gets done, more validation has to get done, more confirmatory analysis gets done, and it's being done on CE because it is as I say the gold standard. And this product is a dynamite product, it's very well-received and I think that's why we're seeing continued demand for what everyone else thought would have perhaps been obsolete by now.

And then just one last one, you mentioned Bioproduction in your comments a few times, talk to some of the trends there, is it largely a shift over to biodisposables and what's your visibility on that market for 2011?

Right. As David said, that's a business that cycles through every couple of years. These very high demand years as a product gets approved by the FDA, and then perhaps modulates as other products are not approved in the subsequent year. But overall, it's a trend line that's in the high-single digits, sometimes low double digits. We benefited in 2010 by the approval of a couple of products, by increased demand of therapeutics of customers that we had and by further penetration of new customers based on a strategy we put in place several years ago to link our Research business with the Bioproduction business and follow these molecules from the very earliest stage. So 2011, as David said, it's going to be a good year for that business. It's just not going to grow at 20% again. And I think it's very normal to see that type of cycle.

And we'll take our next question from Derik De Bruin. [UBS]

So just following up a little bit on Tycho's, I mean, you launched Ion Torrent. Could you just give us a taste on how you see the development progressing, particularly in respect to the sample prep or is that one you're going to highlight at AGBT this week?

Well, I think that's something we're going to highlight more at AGBT. But a couple of points I would make on Ion Torrent, and one is that, we have tried to indicate the scalability of the machine itself. And so we fundamentally believe we're now moving into a post-life era for sequencing and so we'll be able to articulate that more in quarters to come. On the sample prep question, it's a question we get often asked, you'll hear more at AGBT on what we're doing around the PGM instrument. But suffice it to say, there's work underway and we feel very pleased about the overall total solution that will surround the Ion Torrent technology and we'll have more to communicate on that as time goes on.

And then just one other question. So the goal for reaching a 31% operating margin in 2013 is pretty impressive given how strong the margins are right now. Could you just kind of break it down in terms of what are the moving parts to kind of get to that of level?

Yes. In the presentation, we shared a particular chart on how we think about this, but let me take you through the various buckets of where the synergy will come from to get the operating leverage. The first thing is that, for example, on purchasing, we are shifting more of the resources to Asia Pacific. Ironically, we do very little sourcing in that fast-growing region today, so we anticipate very nice savings coming from that. We continue to consolidate our sites. We don't publicly announce which ones are affected but as we have stated in other presentations, we have lots of choices and we continue to consolidate the footprint. The other thing that we're doing is just becoming ever more efficient at how we move products at the right moment in time to our very sophisticated logistics centers around the world. Now today, everything is flying basically in FedEx airplanes and things like that, very expensively. We have key strategies in place on how to move this by land and sea at a much more efficient economical way over the next three years. And then lastly, one of our key tenets when we've merged the two companies was to do no harm. And a good example of that was we took each companies' IT system and basically just put a link between the two and ran the company, and we did quite effectively with that. Now over the next three years, we're going to actually shut down the entire IT system of 1/2 of the company, merge it into the other, do it very methodically and we can save tens of millions of dollars as we do that over the next three years. So those are some examples.

And we'll take our next question from Ross Muken. [Deutsche Bank]

Actually, Mike here for Ross. Just kind of talking a bit more about the Ion Torrent Personal Genome Machine, I was curious kind of how you see the market developing on near-term basis? You, obviously, talked about some early success you've had. Can you talk about some of the kind of early customers that you've had and kind of where they've come from? And then over the next six, 12 and 18 months, how you see the market developing in terms of who are going to be the early and then kind of later adopters?

Well, I think it's important to note how sequencing -- next-generation sequencing has actually developed just over the last couple of years, has primarily happened in the heavy users, the genome centers. And so when we think about the technology now moving out over the next few years, we want to put it into as many labs as possible and essentially follow the very successful strategy that we had with qPCR. And so this Personal Genome Machine has been sold to customers that, A, can buy more than one, B, that can collaborate with us on the usage of it, the sample preparation of it, the data analysis of it and quickly iterate with us on improvements, so that we can get them back out to the user community. Now that's phase one of the customer base. I would tell you we're actually holding back orders right now because we want to make sure that, that iteration happens a few more times before we take the next, if you will, level or concentric circle of growth that we see with this PGM instrument. But the PGM instrument, we ultimately believe and further refinements of it can mimic very much like a qPCR machine in terms of its penetration in virtually every lab in the world. Now how that fits in with our strategy is as you can understand, lab technologies has a very broad distribution network. We're in virtually every country that does science, and so a product like this very much plays to our sales and service and technical support strength. And so that's how we're thinking about it.

And we'll take our next question from Marshall Urist. [Morgan Stanley]

First question, just for David, on the margin and expense picture for next year, it'd be helpful just first on gross margin, I know you gave us some detail there but where would you think you would exit the year, or, I guess, in the back half of the year? Kind of where would you think you'll be as we start to think about momentum off of the currency dilution into 2011? And then also just plans on R&D and SG&A next year, and how much leverage are you looking for on those lines as well? That'd be helpful.

Well, what we've said first, on gross margin, what we said was that gross margin for the year would be roughly flat to down 50 basis points. So we’ve provided it would be down 160 basis points year-over-year in the first half of the year. So that gives you some idea of what the increase is or the acceleration in the second half of the year, on the gross margin line.

And then on R&D and SG&A?

Yes, in terms on R&D, we're continuing to, as we said before, target roughly 10% of sales. And SG&A and our other expenses, that's going to be an area where we're focusing on as Greg mentioned, some of the programs that we have underway, whether it be in marketing, plant overhead, whatever, to drive some of our 75-plus basis points of operating margin improvement.

And then just one other one, if you just talk about 2011 -- I know you talked about a high-level organic growth over but from a segment perspective, from Molecular Biology, Genetic Systems and Cell Systems as we think about, since there's a little bit different comp base in each of those going into '11, could you talk about how you're thinking about those three different segments in 2011? It would be helpful.

Yes, Marshall, this is Eileen. Let me give you some color on what we expect for organic growth by region or by division. For Molecular Biology Systems, we anticipate that to be mid-single digits. For Genetic Systems, we expect that to be high-single digits. And Cell Systems, mid- to high-single digits in terms of organic growth.

And our next question comes from John Groberg. [Macquarie]

First question, Greg, can you maybe -- a lot of focus obviously gets placed on the old legacy AB businesses. Can you maybe talk about how some of the legacy Invitrogen businesses are doing? And I guess, quickly, on the not so much in the Bioproduction business that your talking about but in the Molecular Biology division?

Yes, you bet. The Molecular Biology business has been doing okay. I'd say it's been kind of the lower end of mid-single digit growth over the last year and a half or so. The Cell Biology business, the old molecular probes and pieces of Dynal, as Eileen said earlier, is growing very nicely still. And when you then combine it overall with the media business, the Bioproduction business, it has continued to perform in the mid-single digits, higher end of that range overall. So the old Invitrogen has continued to kind of chug along as it always has.

And then if I can just one more, David mentioned kind of the importance potentially of Ion Torrent in the second half of the year starting to contribute some revenues. Can you talk -- obviously a competitor introduced, at least announced a potential product? Can you talk about whether or not in terms of your order book? You've had any success in stalling the market, kind of what you're seeing internally? And then also do you have any constraints from the manufacturing standpoint, can you maybe just talk about your manufacturing capabilities to scale up as that product scales?

Yes, I'll grab that one. So I think the good news is that we have a product that we're selling and shipping right now and that other product you mentioned is simply on a piece of paper. And so we're moving forward, taking orders as I said before and doing well, and the product has enormous runway ahead of it. So the good news is that when people buy the PGM, they know they're actually buying a platform that has perhaps even more throughput than that product you mentioned in terms of its specifications. Finally, the last part, you asked about the ability to fulfill the orders. We have relationships, we have a very solid supply chain that we've worked out with Ion Torrent and the suppliers and we feel very good in our ability to deliver.

Just to add on that. The chips are from foundry that has massive capacity relative to where our current needs are, and the housing and electronics are manufactured by the same company that manufactured the Xbox. So there is plenty of capacity out there to meet our current needs.

And we'll take our next question coming from Amit Bhalla. [Citigroup]

Two questions. First in Europe, it looks like Europe has been holding in pretty resilient with the 5% organic growth ex H1N1 obviously. Can you talk about just Eastern Europe versus Western Europe and some of the trends you've seen there?

Certainly. So Eastern Europe, Middle East, Turkey especially, Israel in particular, Africa, are where we see the real growth happening in that region we call EMEA, most companies do. And so as we move into 2011, more resources are being shifted from Western Europe into those geographic centers. The good news is we already had the infrastructure in place, we'd started this when we merged the two companies and so now we're just adding on more resources to get the growth there versus Western Europe.

Can you put any numbers around it, if you got 5% organic in total Europe, what's the difference between the two? And the second question I have -- my follow-up was on that pricing, can you give us a ballpark of what kind of impact pricing was?

Well, I think just on growth in Europe, what we've said before is that we're growing at low- to mid-single digits in most of the large major markets. There's some more uncertainty in some of our smaller markets in Southern Europe, like Greece and Portugal. And then in Eastern Europe and some of the smaller areas, as Greg mentioned, there they tend to grow at a higher end of the range on high-single digits. And then you had a second question?

On pricing.

Yes, on pricing. As we've traditionally said, we've gotten roughly 1.5% in terms of price this year and we're targeting another 1% to 2% next year.

I was actually just asking about the hit on pricing in the quarter?

The hit? The down on pricing in the quarter?

Yes.

That's just a case of what we typically experience as the year goes on. It is more discounting and degradation of our list pricing. And we also tend to have larger orders placed at the end of the year. And the net result is our net realized price is slightly lower in the quarter than it is in the other quarters.

We'll take our final question coming from Jon Wood. [Jefferies & Company]

Greg, I think you mentioned RT-PCR growing 12% adjusted in 2010. Is it unreasonable to think that business can grow double digits again in 2011 or are there comp issues that you foresee in 2011?

Jon, look I think that business overall has very good fundamentals for a variety of reasons as we've talked before. And we think it will continue to gain share due to the launch of Stokes technology and some other technology that we will be announcing. But we're not prepared yet to give an estimate for 2011 for the Instrument business other than it's going to do, we think, pretty darn good this year.

We don't see anything changing in the underlying industry fundamentals.

And then last one for David. On the cash flow, $80 million of onetime restructuring in '11, is that still related to AB?

It's related to, as Greg mentioned, site consolidations whether they be sales office consolidations, back-office consolidations or plant closures. But it also includes other restructuring or productivity improvement initiatives we have underway. So Greg mentioned, we're looking at the marketing organization, how we can do that more effectively. We expect there will be some costs associated with those changes.

So is that a number that we should expect continues kind of beyond '11 just at a lower level, like will you have these kind of restructuring type of expenses every year or will they completely go away?

We will continue to drive productivity improvement all through the business. So I would expect that there would be some costs on an ongoing basis. But they should definitely come down over time as they have. Exactly.

So there's one question I wanted to clarify before we ended the call. I think Doug asked earlier why our operating margin differed from the guidance we gave in Q3? And I just wanted to clarify that, as we saw benefits on the tax line coming through throughout the quarter, we decided at that point it would be a good opportunity for us to make investments back into the business. So that would be why, the reasons why our operating margin guidance is different from our actual results in the quarter, okay? So this concludes our fourth quarter and full year 2010 earnings conference call. This webcast will be available via a replay on our website for three weeks. Thank you all for joining us today.

Ladies and gentlemen, this does conclude your conference. You may now disconnect. Have a great day.