Good day, ladies and gentlemen, and welcome to the Q4 2013 Bio-Rad Laboratories, Inc. Earnings Conference Call. My name is Ben, and I will be your operator for today. [Operator Instructions] I will remind you this call is being recorded for replay purposes. And I would now like to turn the call over to Mr. Ron Hutton, Vice President and Treasurer. Please proceed, sir.

Thanks, Ben. 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, Executive Vice President and CFO.

Thanks, Ron. Good afternoon, everyone, and thank you for joining us. Today, we will review the fourth quarter and full year results for 2013 as well as provide some insight into our thinking for 2014. With me today are Norman Schwartz, John Goetz and Brad Crutchfield. Let's start with a review of the quarterly results. We are pleased to report that net sales for the fourth quarter of fiscal 2013 were a record $602.6 million, an increase of 5% versus the year ago period sales of $573.8 million. On a currency-neutral basis, quarterly sales were 5.7%. During the quarter, we experienced good currency-neutral sales growth across many of our product lines, most notably in our Life Science group, including continued strong sales of our Droplet Digital PCR products and $6 million of sales contributed by our new antibody business. Excluding currency and the addition of AbD Serotec, organic sales increased 4.7% compared to last year. The consolidated gross margin for the quarter was lower than expectations at 53.6% and compares to last year's gross margin of 54.8%. The decline in margin versus last year is primarily reflective of product mix, increased amortization costs and $2.6 million of expense associated with some manufacturing consolidations in the U.S. and Europe. During the quarter, we recorded a total of approximately $8.3 million in cost of goods sold for the noncash purchase accounting expense related to acquisitions. This compares to $6.9 million in the year ago period. SG&A expense for the fourth quarter was $214.6 million or 35.6% of sales compared to $188.9 million or 32.9% of sales last year. The increase in spend versus last year is partially related to incremental costs associated with the acquired antibody business as well as for our ERP project. The current quarter SG&A also includes an additional…

[Operator Instructions] The first question we have comes from the line of Dan Leonard from Leerink.

I guess, for starters, I could the math, but I'm in transit right now. Christine, what do all the components of your guidance roll up to in EPS number?

Dan, as you probably know, EPS is not a number that we guide to. We haven't historically and we don't intend to. We try and give some margin help.

Got it. Okay. Well, then, a couple of questions on the quarter. What specifically was the mix headwind, which weighed on gross margin in the quarter? Was it the Digital PCR business coming in at much lower margin than the balance? Is it something different?

No, I think product mix, which is typical of our fourth quarter. Oftentimes, it'll shift more heavily towards instruments, which do carry a lower gross margin. In this case, I think most of the pressure we felt was on the Diagnostics side of the business where the instrument placements in Q4 were pretty sizable. And then also the onetime expense associated with some consolidation of manufacturing sites.

Okay. And then...

And the other thing, Dan, remember that last year we didn't have the med device tax, too, and that's a burden, $1.5 million to $2 million a quarter for us, as well.

Sure. Even when I back out the manufacturing consolidation and take into consideration the typically heavier instrument quarter, it still came in a little bit light versus what we are looking for, so I was wondering if there was something specifically to call out. But that's fine. On Digital PCR, since you called out the installed base there, which was pretty good, what are the main applications where that product line is getting traction?

This is Brad. I'll take this. Clearly, infectious disease is an area, general pathogen detection, but really, around oncology and rare event detection. I mean, what people are finding is that there's certain applications that can be done with Digital PCR that just couldn't be done before. And we're seeing a lot of traction in that area.

And then my final question, and I'll lend the floor to somebody else. What's on deck from an ERP implementation standpoint in 2014? The spend sounds like it's going up. Do you plan to go live with another module or in another country? What's the expectation there?

So our current expectation is that we will spend 2014 doing the design and blueprinting for what we call deployment 2, and deployment 2 brings in the rest of the U.S. You may remember that our first deployment was small portion of our U.S. business so we could run our test case on the global design, et cetera. This year, we will be working on the design for the rest of North America, for the most part, and hopefully we'll go live with that in 2015.

Your next question comes from the line of Brandon Couillard from Jefferies.

Christine, in terms of the organic growth outlook, any chance you could give us more color on the Life Science versus Diagnostics, what's baked into the 2.5%?

A little bit, Brandon. And as I mentioned, I think the momentum for Life Science is picking up or even starting to see signs of life in Europe. So our expectation is that growth, organic growth, should accelerate as we move into 2014. Having said that, on the Diagnostic side, which represents 2/3 of our sales, the headwinds are pretty strong. Europe is a huge portion, almost a 1/3 of their total revenues and it's a tough market. We're actually anticipating that it will be down for us next year. And so I think the net of those 2 is what's keeping our current expectation to be very similar growth rate in 2014 as we saw in 2013.

And then in terms of the P&L, could you quantify the ERP-specific expenses that were both in the income statement in '13 and then what you're contemplating for '14?

Brandon, I don't have that in front of me right this minute. So let me see if I can get that and then I'll come back a bit.

Okay. And then in the Life Science business in the third quarter, I know chromatography tended to be lumpy from time-to-time. Was there an unusual order or lumpy booking in the period?

This is Brad. I think, in general, we had a stronger fourth quarter in systems or hardware. But in general, there wasn't anything really that stands out between the third and fourth quarter for process chromatography.

Got you. And then, Brad, just on the Digital PCR placements, can you give us a sense of what your expectation is for the annualized consumable stream per system at, let's say, steady state?

Well, we're seeing something in the range of sort of 20% to 25% of the revenue coming from consumables. And one of the things that's very encouraging is we watch the placements of these instruments in the sense that this is fairly unique within a life science context of a closed platform. We have a pretty good measure of how these instruments are being used and they're being used quite heavily. So that's a very encouraging sign for our future.

Okay. And last one for Norman. There's been several assets sort of in the space, both in Diagnostics and Life Science, that have traded recently. Can you just give us a view on your sense of the pipeline? And what's the chance that we actually see some activity, either bolt-on or something of magnitude, here in '14 on the M&A front?

Of course, as you know, we've got about $600 million in cash that we'd obviously like to deploy. We've been kind of pretty careful of not letting that burn a hole in our pocket in the meantime as we bid on assets in '13. I would say that it seems that there's not a tremendous amount in the pipeline at the moment. There are a few things out there that we were kind of taking a look at, but it's not -- the funnel is not as full as it has been in the past. Having said that, there are a couple of interesting things that we are looking at and hopeful that we can land something.

[Operator Instructions] The next question we have comes from the line of Jeffrey Matthews from RAM Partners.

Wondered if you could just kind of take a trip around the world. You called out good business in emerging markets. Could you talk a little bit about areas of strength?

Sure. Maybe we can talk about it -- what we're seeing in the group.

This is Brad, and we'll talk about Life Science. [Technical Difficulty] Are you still there? Okay. So actually we did see a turnaround in North America, certainly as we settled the government sequestration that appeared to be ending, and ultimately, that helped a little bit in the US. Europe was strong for us. And Europe has been kind of returning and coming back online as governments sort of rationalized their austerity measures. We saw particularly strong growth in the emerging markets, specifically in Russia. We've invested a lot there in building out a direct sales organization. We were still tempered a little bit as we've made this transition in China and kind of getting that behind us in the fourth quarter. And Japan did pretty good for the fourth quarter, again with pushes of major currency headwind there.

This is John on the Diagnostics side. With respect to North America, our business there is growing and we're focusing a largely amount of our time in the controls and diabetes area as well as immunohematology. Is a transition over to Europe? That is really one where we are challenged. I think, as Christine mentioned, we have price pressures there as well as lab consolidations in the segments that we're in, blood virus being one of the ones that's really, I would say, the area that we're most challenged in. With respect to the emerging markets of Eastern Europe and then as you go into the Asia area, we're doing quite well in all of our segments, particularly diabetes. We're seeing those markets evolving in the area of quality control as more and more hospitals and laboratories are interested in implementing quality control in those markets as well as in immunohematology. We had some very nice placements in the fourth quarter and that did hurt our margins a bit, but we look forward to getting the reagent streams in the future.

Great. That's terrific. And then could I ask Norm what the biggest surprise that you saw since 2013, plus or minus? And then what you're really particularly focused on in 2014?

Well, I think Brad alluded to the distributor changeover that we had. I think that we were a little bit surprised by the magnitude of the impact that, that had. And I would also say we're a little bit -- well, maybe we shouldn't have been surprised, but surprised by the government shutdown, which also took its toll on the Life Science business. Sequestration, we had a kind of a sense that was coming, but the shutdown later in the year was a big surprise for us.

Right. And then what are you really focused on in '14, most particularly?

We're focused on -- I mean, certainly, the top line and in trying to grow the top line, especially in these emerging markets areas where we seem to have some pretty robust markets. And internally, also working on the cost side of the equation, looking at our whole kind of the product delivery, how we can more effectively and efficiently deliver the products to the customers. We call that internally our logistics kind of pipeline. And the kind of ringing costs out of the manufacturing organization. Those are some of the things that we're focused on.

Are those kind of things -- don't they -- is that something you have to do the ERP first and see what...

I think that, obviously, you get benefit out of the ERP. But I mean, there are lots of projects that we've got going on that are independent.

Okay. And then could I finally follow up on the ERP and how it's -- how -- what your experience has been thus far into it, plus or minus?

I think the experience has actually been quite good. We managed to turn on the first phase and the place didn't collapse like seems to happen at a lot of these things. A few teething problems, I will admit, as we proceeded during the year. But by and large, it's gone pretty well. And so I think that gives us a lot of confidence in the program that we've got and the ability to get deployment 2 done.

The next question is a further question from the line of Dan Leonard from Leerink.

I just thought since this is the year-end call, I wanted to touch on a couple of product cycles, I don't think we've talked about in little while. So first off, on the BioPlex 2200, you called out the strength there, presumably in autoimmune. Can you remind me where you're at with your menu expansion plans on that instrument? What's on deck for maybe '14 or '15 in terms of broadening that menu?

Yes, we're continuing to broaden it in the autoimmune area. We simply released our celiac test in the United States. It's been on the market since early 2013 outside the U.S. And then we're continuing to work on developing the infectious disease or serology line on that platform.

And any thoughts around the timing on moving your blood virus testing over to the BioPlex channel?

No. Like I said, it's a development process and we're, like I said, we're working on it now. We have hopes that in the coming year we'll be able to have something available.

Okay. And then the other one I wanted to touch on. Bringing your immunohematology DiaMed product line to the U.S, I know you have a presence in the U.S. for the Biotest business, but what are your thoughts on migrating DiaMed over to the States?

Yes, that is clearly in our plan to do that and we're working away at it now. We have a number of initiatives in that area. It is an area of investment for us and has been. I think one of the things that we're focusing on in Diagnostics is to deliver some of these chronic systems to the market that we had targeted. So we're working hard at that. Some of these things are hard to predict because they have a pretty high hurdle in the regulatory area, so I'm a little bit reluctant to try to predict exactly when that's going to happen.

[Operator Instructions] There are no further questions in the queue at this time.

Okay. Thank you, Ben, and thank you, everyone, for taking the time to join us today. Bye-bye.