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…

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. David Westenberg - C.L. King & Associates, Inc.: 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. David Westenberg - C.L. King & Associates, Inc.: 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. David Westenberg - C.L. King & Associates, Inc.: 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. David Westenberg - C.L. King & Associates, Inc.: 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.