Good day, ladies and gentlemen, and welcome to the Q3 2013 Bio-Rad Laboratories, Inc Earnings Conference Call. My name is Glen, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Ron Hutton. Please proceed, sir.

Thank you, Glen. 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. Because our actual results may differ materially from these plans and expectations, 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 the call over to Christine Tsingos, Senior Vice President and CFO.

Thanks, Ron. Good afternoon, everyone, and thank you for joining us. Our third quarter was a bit challenged on the top line, with net sales for the quarter of $505.1 million, an increase of 1.3% on a reported basis and versus the same period last year sales of $498.7 million. On a currency-neutral basis, sales increased 1.8% compared to last year. During the quarter, we experienced good currency-neutral sales growth across many of our key diagnostic product lines, as well as selected Life Science product lines, including $5.5 million of sales contributed by our new antibody business. Excluding currency and the addition of AbD Serotec, organic sales increased just shy of 1% compared to last year. The overall quarterly growth was tempered by a decline in Europe, as well as continued challenges for our Life Science segment related to the constrained academic and government research funding environment. The reported gross margins for the quarter was better-than-expected at 56.3% compared to 54.9% in the year-ago period. This improvement in gross margin is the result of favorable product mix, improved utilization and a $2.9 million one-time benefit related to a correction in the valuation of finished goods inventory for the first half of this year. Excluding this adjustment, the third quarter gross margin was 55.7%. When compared to the same quarter of last year, remember that the third quarter gross margin in 2012 was negatively impacted by a $3.8 million noncash charge for a long-term environmental remediation program. Excluding this environmental remediation charge, consolidated gross margin for the third quarter of 2012 was 55.6%. And finally, the total noncash purchase accounting expense recorded in cost of goods sold related to prior acquisitions was $8.2 million for the quarter, which compares to $6.5 million in the year-ago period. SG&A expenses for the third…

[Operator Instructions] And your first question comes from the line of Brandon Couillard with Jefferies.

Christine, could you help us quantify the aggregate dollar amount booked in the P&L for the ERP system in the third quarter, and perhaps if you could break out the capitalized amount?

I don't have the exact numbers with me, Brandon. I can tell you that the -- if where your question is headed is around how much of the project was expense during the quarter if that was originally intended to be capitalized. It's about $3 million of higher expense than we would have originally anticipated. Cash is the same out the door. And so let me see if I can track this down while we're doing the other questions in terms of the exact dollars of capital and expense in the third quarter.

Okay. And I don't know if Brad or John are there, but with respect to the Life Science business in the third quarter, could you elaborate on what you saw, either from a product perspective. Any color you could give us by geography and how you would characterize the competitive landscape? And then perhaps a view on the change in the distribution network in China. Some detail there would be helpful.

That's a lot of questions there. In general items, we didn't see a lot in -- significant changes in competitiveness of the products. In fact, we have a pretty strong order pipeline. We did have some timing issues as we switched over from the QX100 to the QX200. Some of those sales, which we could have enjoyed in the third quarter will slip into the fourth quarter. In general, Europe is stabilizing for us. I think that we're pretty happy about that. U.S. continues to suffer from sequestration. We didn't see any impact of the government shutdown in the third quarter because that, obviously, happened after. But we really did see some changes in China, some shortfalls in China and really what we're doing is we're moving to a much more closer model to our customers -- large distributors to a more closer, smaller distributor model. And that certainly has had an impact. But that's all consistent with us putting in a better position in the future.

On the diagnostic side, our sales growth, primarily kind of coming from U.S. and China in the area of diabetes controls and autoimmune testing. Where we were challenged, or continue to be challenged is in Europe, and we've had some declines there.

And John, could you give us an update on where you stand with respect to launching the new blood typing system in the U.S. market. Have you submitted that system to the FDA? And what's kind of the timeline, the outlook for commercialization here?

Yes. We're still completing our clinical trials at this time, and we hope to submit to FDA soon. And then after that, it's a little bit about anybody's guess about how long that's going to take.

And your next question comes from the line of Justin Bowers with Leerink Swann.

So just continuing with China there. Is there anyway that you could maybe directionally talk about -- was it down or flat, up slightly in the quarter? And then in terms of the changes that you're making there, maybe timing around when you expect to see an inflection point. And then, maybe how you expect that to help the biz going forward?

Well, certainly, it was down for the quarter. We expect this, over the next few quarters for it to rebound. And really, the most important thing for us is to be closer to our customers. And we find that, that's a lot easier to do with smaller more focused distributors versus larger distributors, and that was certainly the move we make. It's all consistent with us as we move to a more content-solution-based approach. What we need is a much closer relationship with our customers, and so that's why we've made these notes.

Okay. And now just as a follow-up to that. What proportion of the Life Science business is exposed to China currently?

We don't break out to that level of detail.

Okay, okay. And then just maybe from a high level, what are you guys seeing in the dPCR market? And maybe talk about the trajectory there, with some of the changes and the competitive dynamics over the last few months?

Actually, things are going quite well. We did launch in the QX200. As you're aware, there were a couple of new competitors that came on the market early in the year, and that kind of slowed things initially as people stopped to look at that, those products. But the trajectory of our business going forward is accelerating. We do have, again, a good visibility into the fourth quarter and we're doing quite well. This is a market that's now kind of hitting its stride. I think people are -- the applications that are being published, the number of papers have really expanded the use, as we've kind of predicted, far beyond our own imagination into some really exciting area. So we're really excited about this opportunity in the book -- in the future.

Okay, great. And then just 2 more quick ones. With SG&A that came in a little better than us, and I'm just curious if that is -- if there's any -- if that's due to like any change that you guys are operating the business, or if it's accounting related for the way that you're -- for the ERP system. And then finally, you said something about the gross inventory charts in your prepared remarks, and I'm just wondering if you could repeat that and the impact on gross margins?

Sure. So I'm not sure when you talk about SG&A was better than you were expecting, I don't know what your expectations were. But I think -- we think SG&A came in, obviously, much higher than we'd originally anticipated, primarily driven by the $16 million accrual, but then also, some increased ERP-related spend during the quarter.

Okay. That's helpful. I guess, I was just looking, adjusting for the charge there, but that's helpful.

No, I -- so I don't disagree with you because given the lack of air cover on the top line, the margins hung in there. As far as your question on clarification of what's going on in cost of goods sold and the gross margin, during the quarter, we recorded a $2.9 million one-time benefit, and this is basically to make a correction in the valuation of our finished goods inventory for the first half of the year, so through the 9-month period. If -- and that, of course, is a reduction of cost of goods and an improvement of the margin. If we were to take that out, today's gross margin was 55.7%, and that compares to a base gross margin in the third quarter of 2012 of 55.6%. I'm not sure, Justin, if that clarifies your question or if you needed something different.

Yes, it does, it does. I just -- I didn't get the adjusted gross margin figure there, and I was just trying to reconcile it. But I got it now.

And your next question comes from the line of Jeffrey Matthews with RAM Partners.

On the challenges in Europe, I'm particularly interested in whether you think you're losing share in France in Diagnostics, or whether you think this is just a market-related slow down?

In Europe, our primary declines there are coming in the infectious disease blood virus testing area. It's a -- I would say that is masking largely where we're actually getting some growth. It's a big chunk of business for us there. And any slowness or declines there do affect the overall result.

Okay. Is it a market issue, or is it more of a -- you're losing tenders?

It's -- most of this business is tender. And so as those tenders go, you either win big or you lose big. So it's an interesting dynamic that's happening there now as customers are extending their tenders beyond our usual 2-, 3-, 4-year tender. We're seeing tenders much longer than that now. It's driving a lot of heavy competition for tenders, and we're just not that interested in pursuing some of these at such low prices.

Okay. And then I think in the last call, you talked about making some downsizing a bit on the cost side in Europe. Is that -- has that happened?

I think a lot of it has been in process when -- you're talking about when we talked about it in the first quarter of accruing for some changes in Europe. And that's -- that's ongoing and it's something we continue to look at.

Okay. Europe is notoriously difficult to reduce headcount. Have you had any -- is there any structural impediment -- is there any structural impediment to it, or has that been proceeding as you had planned?

No, I don't think there's any structural impediment. It's just a question of the process. It's kind of a long drawn-out process.

Sure, sure. Okay. And then on the -- I wanted to just understand the comments on the China distribution a little better. Is the shift the result of changes in the China marketplace itself? Or did you go into China with the wrong distributors, I guess, is a kind of a bad way of asking it?

No, no, no. I think this is really adjustments that we've wanted to make. As Brad said, it's just kind of shifting our distribution strategy a little bit and adjusting for that.

Okay. ERP, any -- have you rolled it out in any -- or gone live in any other spots?

No, not yet. We've -- we have pretty good luck with our first deployment. We're obviously doing a little cleanup from that and getting ready for the second deployment. Probably the next deployment will be some time late next year, something like that.

In the first half of 2015.

Yes.

Yes.

And [indiscernible] the rest of the U.S.

Okay, that was in my notes. I had you saying in the last call that you were looking to work on the rest of the U.S. towards the fall. But was that -- did I get that wrong or...

No, no, that's so -- it is true that we're in the midst now of starting to plan for the second deployment, which is the rest of the U.S., so that's kind of in the fall commentary from before. And as we start 2014, we will go in depth in terms of that blueprinting process and begin the implementation throughout the year, and then hopefully, go live very early of 2015.

Okay. And no horror stories, no freak outs so far?

No, we're still in business and serving our customers. Obviously, there's always challenges of getting people to adopt to a new system, but I don't think there's anything different here than other companies would face. And I think we've been pleased with the results, so far.

At this time, we have no further questions from the phone lines.

Kindly poll one more time, please.

[Operator Instructions] And your next question comes from the line of Sam Seagull [ph] with Senator [ph].

Just wanted to clarify a little bit, an earlier question that was asked around timing. Obviously, it seems that some of the underlying markets were softer than hoped. But the tone, I guess, seems a little more constructive than perhaps, the softness in the quarter might suggest. So whether it's with the switching distributors in China or otherwise, I mean, bigger picture, how are you guys feeling as you, I guess, you round out the year, more or less the same? Same trajectory of growth? Incrementally worse, or encouraged by certain markets? And I mean, just big picture if you could try to characterize the mindset as we finish out this year and head into next?

I think we're thinking kind of more the same, kind of a similar pattern for the rest of the year as we've seen for the first 3 quarters. I don't see any major changes up or down. It's about where we are.

Yes, I think I'd add, Sam, as you know our fourth quarter is generally our largest quarter of the year, and I think that the pipeline is indicating the same pattern to happen this year as well. In terms of overall growth, as Norman was talking about, we had a decent fourth quarter in the year-ago period. So the growth rates may still be in that 2% for the base business, 3% with the acquired sale range when all is said and done. But the pipeline is indicating that Q4 should have a similar pattern to what we've seen in prior years.

And your next question comes from the line of Brian Turner with Levin Capital. Moving to the next question, Brian, you may queue up again. And your next question comes from the line of Jeffrey Matthews with RAM partners.

Two questions, and one is always asked. I'd like to ask Norman about the acquisition environment. But first, I wanted to follow-up again on something that came up in the last quarter call, where I think Japan was a little off, and the comment last time was that you thought that you saw a shift in how they were funding research. You expected it to come back in the second half, and I'm wondering if that was the case?

And that's more of a Life Science?

Yes, yes.

I don't think there's been any change in Japan that I'm aware of.

Yes, Japan is slow and we don't expect to see really, any -- I mean, obviously, their currency is a way off, but we don't expect really any paramount in Japan until the first quarter of 2014. I mean, a lot of businesses has been pushed off. So it continues to be slow and down for the quarter, and I think we're seeing that trend is going to continue.

For the Life Science market.

The Life Science market.

And that stems from just government policy, Brad?

Yes, it's government policy. What they did is they're sort of struggling how they're going to fund research, and what they did is they allowed the researchers to put off their spend. So we don't really have that kind of cliff that we usually see in the fourth quarter, our fourth quarter, and it's all being pushed into the first quarter, our first quarter, which would be their fourth quarter in their fiscal year.

Got it. And could I just follow-up before asking Norman about acquisitions. Have you -- what have you seen in China? There's a huge variety of opinions out there on what companies are staying out of China these days. And distribution issues aside, do you see any change in appetite?

I think the idea of China being sort of a runaway growth engine is probably not the case going forward. I think there's a lot more critical thinking in how grants or -- and government funding is doled out. Certainly, you have a local pharma market that's coming up, and the CRO business is coming up as well. So in general, I think China is still a nice upside and -- but I would say, end of the school, that the growth is going to be probably more tempered as sort of a market growth around 10% to 12% versus maybe a 14% to 17%.

Okay. And then the acquisitions?

We continue to look at acquisitions. We've got couple of interesting things we're looking at, at the moment. And as you know, you can never tell whether these things are going to come to fruition are not, but I think that certainly, the ones that we've done earlier, especially the Life Science acquisition, I think they're proving to be pretty good additions for us and we're rolling out those products. And so we feel pretty good about what we've done and again, we've got a few more things in the pipeline.

And your next question comes from the line of Mr. Brian Turner with Levin Capital.

Two questions. First question, just can you help me understand if you had to sort of put a weighting on the softness in Europe versus the academic softness. Is it sort of equally in terms of the contribution to your 2%, 3% top line guidance? And then if you had to take a guess, which one do you think would turn more quickly. That's the first question. And second question is related to Sartorious. Have you increased your number of shares held since last quarter?

So the first question. I think it's kind of hard to quantify kind of off the top of my head, what -- which has more impact. I think that in terms of which part of the business we'd expect to turn faster, probably the Life Science part. The Diagnostics part tends to be a kind of a more steady-state business. But again, it's very hard to quantify for you, which one has more impact. They both have some impact. We do continue to have an interest in Sartorius and do, from time to time, accumulate shares.

Any other questions, Brian?

No. That's it.

And at this time, we have no further questions from the phone lines.

Okay, great. Well thank you, everyone, for taking the time to join us today. Bye-bye.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great evening.