賽默飛世爾科技 (TMO) 2006 Q4 法說會逐字稿

Welcome to the fourth-quarter and year-end 2006 Invitrogen Corporation earnings conference call. My name is Bill, and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. However, we will be conducting a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today's presentation, Ms. Amanda Clardy, Vice President of Investor Relations. Please proceed, ma'am.

Thank you, Bill, and good afternoon, everyone. Welcome to Invitrogen's fourth-quarter and fiscal-year 2006 earnings conference call. I am Amanda Clardy, Invitrogen's Vice President of Investor Relations. And joining me on the call today are Greg Lucier, our Chairman and CEO, and David Hoffmeister, our Chief Financial Officer. If you haven't received a copy of today's press release, you may get one from our website at Invitrogen.com.

Before we begin, 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 that 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 will 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.

On today's call, we will begin with prepared remarks and then open the lines up for questions as time permits. I will now hand the call over to Greg.

Thank you, Amanda. I would like to start by saying we're encouraged by our fourth-quarter results. In Q4, we achieved a record level of revenue and EPS in the Company's 20-year history, with $330 million in sales and $1.01 of non-GAAP earnings per share, which represents a 12% increase year over year.

The quarter was stronger than we originally expected, due to a combination of favorable market factors, including a reversal of trends we experienced in late Q3; currency; and strong performance in our BioProduction media segment.

For the full year, our revenue was $1.26 billion, an increase of 5% over 2005, with non-GAAP EPS of $3.67, which is a 6% increase over the prior year.

That said, as most of you know, 2006 had its fair share of challenges for us as a Company and I would like to address some of those challenges and what we have done to address each one in the last 90 days.

Cyclically down businesses -- in the first half of 2006, our Sera business was down 40% year over year. And so we undertook a full review of this segment. Based on this study, we developed an approach that allowed us to more effectively manage the collections and cash generation of the business and still offer a vital product to our customers. We're confident this plan, which is now being executed, will allow us to minimize the wild swing we saw in 2006 and future years.

Our BioProduction Media business was also down in the first half of the year, but this was more a result of very difficult comparables and timing of orders from some of our very large clients. As the second-half performance of 2006 has shown, this Production Media business of Cell Culture Systems is very healthy, and has returned to positive growth now.

The second area is mix shift. In the second half of the year, volume from some of our lower-margin businesses, including some products acquired from past acquisitions, became a larger piece of the Company's total revenue, causing a decline in our historically high gross margins. This shift was most noticeable in the United States.

To address this issue, we have taken several actions in the last few months. First, a new global sales leader was named. In the United States, we have implemented programs to improve overall selling time. A new centralized pricing team has been created. And we now have harmonized compensation systems across the product mix in Europe, the U.S.A. and our major markets in Asia. We're confident these actions will restore growth in the Americas to a comparable performance level like we have achieved in Europe and Asia-Pacific as well.

The third area is manufacturing and freight costs. In the second half of the year, our cost to manufacture and ship products increased significantly. Several of our plants have declined in productivity, either due to integrations or lower-than-anticipated volume. The integration-related issues followed the closure and consolidation of the two antibody plants to our BioSource facility in Southern California. The facility integration is now complete, and a reliable delivery stream to our clients is now taking place. But there's still work to be done in order to achieve the full-cost synergies we expect.

Additionally, we have productivity plans in place at some of our largest plants, from which we expect to see benefits over the course of this year.

Finally, freight logistics continues to be a source of increased costs, which we have only partially offset by increased freight revenue. Between 2005 and 2006, our portfolio of product offerings exploded in size. And the logistic patterns associated with that change overwhelmed the existing approach in place at the Company. Seasoned logistics experts have now been recruited in this area, and we expect solid improvements in the coming months.

Now, I just addressed integration issues as they relate to manufacturing. But as you well know, integrations affect the Company in nearly every area. Over the last several years, we accelerated the pace of acquisitions to change the growth profile of this Company. We're now 15 companies coming together on top of the Invitrogen and Life Technologies merger.

As you know, integrations are difficult. For us, they turned out to be especially challenging when placed on top of an immature infrastructure and organization. So we paid the price in 2006 through an underperformance that was unacceptable to you as shareholders and to the members of this management team.

However, adversity has its purposes. And these challenges forced us to confront and fix some fundamental issues in our sales organization and back office operations.

It also forced us to ask what businesses we wanted to be in. And so we undertook a full portfolio review to understand our core competencies and how they could best be leveraged.

As a result of this review, we have made the decision to divest two business units. As we announced in our press release today, we sold the diagnostics subsidiary of BioSource, located in Belgium, which was a small component of the BioSource franchise we acquired in 2005. Additionally, we're selling BioReliance to Avista Capital Partners for $210 million.

When we purchased this business in 2004, we believed there would be great synergy between Invitrogen's cell culture media business and the testing and development capabilities within BioReliance. Quite frankly, the strategic fit never materialized, as clients believed each offering had to stand on its own. I would also say that we owned this business at a particularly bad period for biologics and their movement through the pipeline.

In the end, we bought BioReliance for the right reasons, and we believe we're selling it for the right reasons, too. We're moving on. The Company is strong and more focused than ever on driving success. We remain committed to be bioproduction space as a partner for advanced cell culture products and our PD-Direct services that help companies achieve process [scale-up].

Speaking of success, we have not spent much time talking about those ones that we had in 2006. And so let me take this opportunity to highlight a few. Molecular Probes grew in solid double digits again, led by dye sales for flow and imaging, as well as continued adoption of the Qdot nanocrystals technology.

Desktop devices and full systems -- this is an interesting and emerging area for the Company. We were very pleased with the overwhelming success of some of these devices we launched in 2006. These devices provide significant time savings to customers. For example, with the new iBlot system, a western can now be done in seven minutes, down from several hours.

And we continue to expand our portfolio of products for epigenetics with not only our own developments, but also acquisition of key licenses. We expect this to be a growth area for us, and we will be increasing our R&D investment here by over 80% in 2007.

In Q4, sales of BioSource products grew in the double digits, led by multiplexed assays for cytokine profiling and signal transduction assays. We have seen especially strong growth in the European market. We finished the facility consolidation of Caltag, Zymed, and BioSource. And these companies now have one of the largest portfolios of antibodies on the market. And in fact, we grew over 20% in primary mouse antibodies and 15% in human antibodies for the full year. And finally, we completed the acquisition of Sentigen, adding to our GPCR drug discovery capabilities.

In summary, 2006 was a pivotal year in the evolution of our Company. We made some hard decisions and some wise investment choices that will set this Company up for success in 2007 and beyond. Our people are better and more determined than ever.

Now, let me move into our key focus areas for 2007. There are two things that are never questioned about our Company -- the value of our brand, which is resoundingly validated by independent surveys and industry awards; and our ability to create transformative products.

This year marks our 20th anniversary. For 20 years, we have been providing original, high-quality, reliable technologies that transform the way researchers do science. In 2007, we will continue this investment in our brand and our technology portfolio, but will also focus on three specific areas.

First, improving the operating efficiency in both our manufacturing plants, as well as our back office organizations. Our goal is to expand operating margin by 100 basis points. Inside the Company, this initiative is all about finding a better way.

Second, optimize the mix of product sold that will lead to higher margins and faster growth. I've already mentioned the actions we have taken in late 2006 and early 2007. We will be continually monitoring these programs to ensure they are achieving the right level of improvement that we desire.

Third, continue to refine and define the infrastructure that is so necessary to run the Company today and into the future. This includes the global ERP system being implemented, further facility consolidations into our major campuses, and increased training of our associates.

It is with these key imperatives that we will expect to deliver revenue growth in the low to mid single digits and non-GAAP earnings per share growth two to three times that revenue growth.

As I said earlier, adversity has its purposes. 2006 was a painful year for you as shareholders and us as leaders. However, the Company is stronger now, more seasoned, and poised for nice success in 2007.

With that, I will now turn it over to David to talk more specifically about our 2006 results and our expectations for the coming year. David?

Thank you, Greg, and good afternoon, everyone. I am happy to be here discussing our financial results for the first time this year.

As reported in this afternoon's press release, fourth-quarter 2006 sales were $330 million. This represents a 6% sequential increase over third quarter 2006. This was above our industry's expectations.

Year-over-year revenues for the quarter grew 2%, with foreign currency having an impact of 3 points. Adjusting for currency and the divestiture of our BioReliance German manufacturing plant announced earlier this year, we achieved modest organic revenue growth. However, remember that we had a record level of sales in the fourth quarter of 2005, with a significant number of large customer orders in both segments, creating a difficult year-to-year comparison.

Additionally, our Sera business unit ended the year down approximately 20% versus 2005. The decline in this business unit had 1.5 points of unfavorable impact growth in the quarter and 2.5 points on the full year. So without the impact from Sera, fourth-quarter revenue growth would have been 3%, and full-year revenue growth would have been 8%.

We are encouraged with the revenue results we achieved in the fourth quarter, driven by both segments of our business. Let me talk a minute about BioDiscovery. BioDiscovery fourth-quarter revenue growth was $213 million, up 3% year over year. Again, recall we had an exceptional fourth quarter in 2005, with OEM sales in several businesses being at record levels, as well as a few other onetime large customer orders. BioDiscovery ended the year with 12% revenue growth.

In our press release today, we highlighted several areas that contributed to segment revenue results in the fourth quarter, so I won't go over those specifics again. But I will take a moment to elaborate on a few other points as they relate to BioDiscovery revenue.

Asia-Pacific had double-digit growth, driven by high double-digit growth in emerging markets, as well as solid single-digit growth in Japan, which is the first time in three quarters that this country has been a contributor to our growth. We are seeing success in Japan based on our new sales and marketing campaigns, as well as the accelerated adoption of our most differentiated technologies, such as Molecular Probes.

The success of probes in Japan is one of the reasons that our Molecular Probes division continues to deliver double-digit growth quarter after quarter. This team is continually innovating in everything from the products introduced to the markets they enter to the marketing campaigns they launch. Additionally, labeling and detection products are one of the most enabling technologies we have, and thus the Molecular Probes team is continually partnering with other divisions to combine multiple offerings into one convenient kit.

Let me now turn to Cell Culture Systems. Cell Culture Systems had another quarter of good revenue growth. Fourth-quarter and full-year revenues were $117 million and $442 million, respectively, which represents a decline of 1% and 4%, respectively. However, the declines in this segment were impacted by two items -- one, the divestiture of BioReliance Germany, which happened in April of 2006. This business unit had sales of approximately $2.5 million per quarter.

And two, the decline in our Sera business unit -- Sera declined 11% in the fourth quarter to $27 million, and declined approximately 20% for the full year to $92 million.

The declines in the Sera business unit had an impact of 3.5 points on the fourth quarter and 4.5 points on the year. And the sale of BioReliance Germany had an impact of 3 points on the quarter and 2 points on the full year. So in summary, without the impact of these two items, Cell Culture Systems would have grown by 5.5% in the fourth quarter and 2.5% for the full year.

Moving on to gross margins, fourth-quarter gross margin on a non-GAAP basis was 58.7%, which represents a 50 basis point improvement over the previous quarter and a 110 basis point decline from a year ago. Gross margins quarter over quarter improved due to higher volume and lower manufacturing and distribution costs.

In the third quarter, we had increased spending required to consolidate several manufacturing sites into one and to create a bicoastal distribution system. These costs did not repeat in the fourth quarter.

However, in Q4, we did have increased OEM sales. These sales have lower margins than our typical margins, and lowered overall gross margin by about 50 basis points. So adjusting for onetime items and OEM sales, gross margin increased by about 100 basis points.

Gross margin year over year declined 110 basis points, due to a higher mix of lower-margin products, lower volume in our Carlsbad manufacturing facility, and higher distribution costs due to fuel charges and increased packing materials. Full-year gross margins -- our margin was 60.2%.

SG&A was $96 million, an increase of $9 million from the third quarter. The increase was the result of the onetime benefit recognized in the third quarter from the reduction of the bonus accrual, higher legal and accounting fees, and higher commissions associated with increased revenue.

R&D was $24 million, a reduction of $2 million sequentially, due to specific cost actions taken in the quarter. R&D was 7.4% of revenue in Q4 and 8.2% of revenue for the full year. We feel 7% to 8% of sales is an appropriate level of R&D spending for the next few quarters.

We have finally reached critical scale in this group, and it is developing leading products, while at the same time supporting the productivity improvement efforts in our plants.

Operating income was $73 million, an increase of 7% sequentially. Given that our business has mostly fixed cost over the short-term and high gross margins, an additional $20 million in revenue drives a lot of additional income.

In December, we paid off $176 million in convertible debt, resulting in lower interest expense, as well as lower interest income. We were able to partially offset the lower interest income resulting from our lower cash balances by achieving higher yields on short-term investments.

We also had a benefit in taxes this quarter, due to the passing of the R&D tax credit. This lowered taxes by $2 million for the full year, and this reduced our tax rate by 50 basis points, resulting in a year-end tax rate of 30.9%.

Moving on, our diluted share count for the quarter was $49.2 million. We continued our buyback program in the quarter by repurchasing approximately 1 million shares for $50 million. With the $50 million spent on share repurchases and the $176 million spent on debt repurchase, our total spending was $226 million on financing activities in the quarter.

To date, we have repurchased 5.8 million shares for $350 million. That leaves $150 million left on our share repurchase authorization, and through this vehicle, we remain committed to returning excess cash to our shareholders, although the level of buybacks will depend on several factors, including share price, other uses of cash, and expected cash generation, among others.

Non-GAAP earnings per share for the fourth quarter was $1.01, which is an increase of 16% sequentially and 12% over the last year. GAAP earnings per share decreased to a loss of $2.08 per share, as compared to $0.87 earnings per share last year. The loss per share was driven by a goodwill impairment charge of $121 million or $2.45 per share. The charge was primarily related to goodwill recorded within our Cell Culture Systems business segment.

In 2006, we recorded a total of $271 million of goodwill impairment charges, resulting from the review of all the business units within this segment. Our portfolio review is now complete, and no further write-offs are expected.

As a reminder, there is a full reconciliation between GAAP and non-GAAP measures in today's press release and on our website. One item that we exclude from our non-GAAP definition is the cost of stock-option expensing as a result of FAS 123R, which we adopted in 2006 on a prospective basis. That net expense was $6.6 million for the quarter, or $0.13 on a per-share basis. In the last couple of years, we have reduced the number of options granted to the employee base, and continue to take the impact of this expense into our decision on future grants. Our stock option expense has continued to trend down over the last three years.

Turning our attention to the balance sheet, I will go over just a few highlights. We ended the year with $380 million of cash and short-term investments. With the repurchase of debt in December, we ended the year with $1.2 billion in debt, resulting in 2.4 times net debt to EBITDA.

Our return on invested capital, based on full-year results, was 6.2%. But on a rolling 12-month basis, is trending closer to 7%. Our goal is to ultimately have our return on invested capital above our weighted average cost of capital. We feel the plans we have laid out and that Greg covered earlier will move us in that direction.

Free cash flow for the quarter was $90 million. This represents an increase of $31 million over the previous quarter. The increase was driven by higher net income and a decline in cash taxes as a result of deductions relating to our ERP implementation.

Capital expenditures were $17 million. Full-year cash from operating activities was $235 million. Capital expenditures were $61 million, resulting in a full-year cash flow of $174 million.

In our press release today, we provided fiscal year 2007 guidance of low to mid single-digit growth in revenue, which assumes current exchange rates, and 2 to 3 times that for non-GAAP earnings per share. As you know, revenue growth rates may fluctuate quarter to quarter, due to macro funding developments, large customer orders and our ERP implementation.

Today, we announced that we entered into an agreement to sell BioReliance, and we have already completed the sale of a small division of BioSource. These two business units generated approximately $117 million in revenue in 2006. So for starters, you will want to remove that revenue from your estimates.

Although these combined business units generated positive income, our goal is to keep the impact of these divestitures neutral to EPS in 2007. Therefore, all the projections I'm going to discuss are from a 2006 base revenue of $1.115 billion, and the same non-GAAP EPS of $3.67 without stock options expensing or $3.09 with stock options expensing.

So with that, here are some additional details on 2007. We expect that the operating efficiency and mix management plans we have underway will drive improvements in gross margin. But these plans are a multiquarter effort, and results will not be achieved in the first quarter -- full results will not be achieved in the first quarter.

It is with these improvement plans, as well as the divestiture of BioReliance, that we expect to achieve our goal of improving operating margins by 100 basis points over the 2006 level.

Our goal is to have SG&A and R&D grow less than the rate of sales, with the exception of three items. First, in Q1 2007, we will once again begin accruing for an annual bonus payout. That accrual is approximately $7 million per quarter. Second, our annual review process will be complete. Employees will receive merit increases in the second quarter. And third, we will be recognizing $5 million of annual depreciation expense as a result of our ERP implementation. This will start in Q1.

Interest income will be a function of our cash balance, as we don't expect our yields or our vehicles to differ significantly from those used in 2006. On average, our yield is approximately 4%. Interest expense will be slightly below Q4 levels, as we did not pay off the convertible debt until December. And our tax rate is expected to be 30.9%.

Although we expect to continue to our buyback program, we cannot give an estimation of how the future purchases will affect our share count, because it will depend on factors I mentioned earlier. Therefore, you should assume 2007 shares outstanding will be equivalent to Q4 levels.

Capital expenditures are expected to be $60 million to $70 million as we continue our global ERP implementation. Free cash flow will increase at approximately the same rate as net income, with the addition of the onetime benefit we will receive in 2007 from having no bonus payments for 2006. That is approximately $25 million.

Regarding our North American ERP implementation, it may have the same effects on cash that it did last year, when we went live in Europe. As you will recall, inventories increased before and after the implementation and days sales outstanding also increased. We're on track for implementation in the second quarter of this year.

Finally, one last item I will give some color on is our FAS 123R expense. In 2006, this expense was $39 million in total, $30 million on a net basis, or $0.57 per share. This expense includes not only the accounting for options we grant employees, but also the expense related to our employee stock purchase program. This program allows employees to buy the Company's stock at a discount, driving increased Company ownership across a wide base. The expense for this program was approximately $6 million in 2006, and is included in the FAS 123R line.

We expect total stock option expense to decrease by approximately 8% in 2007. However, with the lower share count, it will have approximately the same EPS impact as 2006.

In 2007, we will start reporting two non-GAAP EPS figures -- one without stock option expense, which will be comparable to how we treated this measure in 2006; and one with the impact of stock option expense. We will continue to have a full reconciliation of these measures to GAAP in our press release and on our website.

That ends the prepared portion of our call, so we will now open the lines for questions and I will turn it over to Amanda.

Thanks, David. As he said, we will now open up the line for questions. We request that you ask no more than one or two questions at a time. If you have further questions, please get back in the queue and we will answer your questions as time permits. We're now ready for questions.

(OPERATOR INSTRUCTIONS). Quintin Lai, Robert W. Baird.

Congratulations on a nice end to a very tough 2006. As we take a look now, as you start to anniversary and go against that 2006, it looks like that you will be up against some easier comps. So the low to mid single-digit growth -- does that just take into account any kind of variability that you might have with ERP rollout, and the timing for turning around some of these other programs, Greg?

What I would say to you on our revenue guidance is that we really want to stop focusing on forward-looking statements and spend a lot more time and energy on really running this company for faster growth and higher margins and overall better profitability. So that's the guidance we're giving right now. And obviously, if it does better, you'll be the first to know.

And then as a follow-up, any updates on the Vitality index and some of the new products that have come out? And like, for example, in some of the areas like your protein chip and some of the diagnostics areas, for example?

Actually, we achieved a record level of product vitality. We achieved 9%. And as you know, that's the amount of revenue coming from new products that were introduced in the previous 24 months.

And we have a number of highlights. One of them I did speak about in my prepared comments, the iBlot, which automates the western blotting process from, as you know, taking a couple of hours down to seven minutes. This is a product that has vastly exceeded our expectations, and has proprietary consumables that go with it.

This type of low-cost gadget or instrument for the benchtop is something we're spending a lot of time on. And you'll see more of those instruments come out this year.

As you mentioned, the ProtoArray, our protein chip, we continue to invest in. This year, we will be having over 10,000 active proteins on a chip, which as we understand it is by far the most densely populated set of proteins known in research tools industry. And we have a number of very close collaborations around the world with this chip on a number of different research processes. We think that this is the year that these collaborations really bring to fruition the full power of the technology.

So we are very committed to protein chips, and it is one where unfortunately, tools just take a long time to mature and get adopted. But we think is going to be a very promising, large opportunity as the year progresses and as we go into 2008.

Tycho Peterson, JPMorgan.

For starters, Dave, just to be clear, the number that you are using as a base for the guidance was the $3.09 -- that's what we should be growing it off of if we back out BioReliance?

On EPS?

Yes.

Yes, $3.09 with stock options.

-- with stock options.

Right, okay. And then as we kind of think about R&D spending, I know you talked about 7% to 8% of sales over the next couple of quarters. Greg, you have talked longer-term about getting back to 9% to 10%. How do we think about the ramp there? And then also as we think about the portfolio review, did your review include any R&D projects backing out some of the spending there for things like Mayo Clinic and things like that? Or are those ongoing?

Well, we continue to invest in collaborations. But more broadly, we as part of our overall review process look through every single project. And as you can imagine, with an average product cost of around $500, we have a lot of products and processes being developed. And we really culled them back and really got very focused on where we're going to get the biggest payback. And that explains the -- let's just call it 7% to 8% R&D rate for the next couple of quarters. I still would say to you that the business has the potential to spend more in R&D. But this is where we want to run it for the first few quarters of 2007.

Okay. And then finally, you talked a little bit about OEM sales being at record levels in BioDiscovery. Can you just clarify what that was, and how we should think about that going forward? Because I know it impacted margins, I think.

I will just broadly say what it is, and then David can give more particulars. But one of our strategies has been to be a private-label supplier to molecular diagnostic companies, and then also other research tools companies. And those are the OEM sales we're speaking about. And typically, they do fall in the fourth quarter. That is just contractually how it works. And so that is what we talk about when we're speaking of OEM sales.

David, to you want to elaborate any more --?

No, I think that that pretty much summarizes it. We have said all along that we expect higher sales of OEM products in the fourth quarter. Those sales are at lower margins. And the only thing that I said in addition to that in the prepared remarks were those sales lower margins in the fourth quarter by about 50 basis points.

John Sullivan, Leerink Swann.

Congratulations on a good fourth quarter. A question about BioReliance -- can you talk about the sort of profitability that you were seeing at BioReliance, or the contribution margin as we think about the Company without BioReliance on a going-forward basis?

We really haven't commented much on the -- given details on the profitability of BioReliance. It had a lower gross margin and high fixed costs. And I think we have said earlier that as volume in there declined, margins dropped as a result.

Okay. And then, Dave, I guess a guidance question. Can you just talk -- can you just clarify what you are expecting again in cash from operations and free cash flow for 2007?

What we said was that free cash flow would grow in line with net income. We said net income would increase -- or earnings per share would increase two to three times our revenue growth rate.

Jon Wood, Bank of America Securities.

Can you give us any incremental balance sheet metrics from BioReliance? And what's the expected timing on the close of that transaction?

I will talk to the last part. And David, you can talk to the balance sheet implications. But the agreement to sell the business was signed today with Avista Capital Partners for $210 million. We expect the normal approval cycle to take place, including Hart-Scott-Rodino review. However, we believe that the transaction should be closing within 60 days. And as -- I think we said our prepared comments that we're going to be putting BioReliance into discontinued operations starting January 1, 2007.

And just on the balance sheet, at that point in time, we will give you more of the balance sheet impact.

Okay, and then one quick one. You said you had $150 million left on the share repo authorization. (multiple speakers) Should we assume that the incremental 210 -- will you increase your authorization by the $210 million, or is that inclusive of within that $150 million?

The $210 million is cash that will going to our bank account. And the authorization from our Board of Directors was separate from that -- a total of $500 million, of which $150 million is remaining.

Derik De Bruin, UBS.

What was going on in the North American markets that was causing it to be a little bit weak this quarter? Or was that just tough comps?

I think that was basically just tough comps, Derik. More broadly, on 2006, let me just say a few thoughts. If you look at our performance in Europe, we had good, solid growth in 2006. If you look at our growth in Asia-Pacific, it was good double-digit growth.

Where we had our challenges in 2006 was in the Americas market. We think primarily, that was all self-induced. And I tried to elude in my prepared comments on a number of changes we have made now in the last 100 days to our Americas team -- new sales leader, new pricing team, new talent, and I think a sales team now that is being very much focused on the right product mix. And I would say we have already started to see very promising results in the first part of 2007.

This is a follow-up to that. So I guess the question leads into how do you determine the right product mix, and that the sales force is doing what they need to do in order to optimize the margin mix?

I would say that is obviously a very complicated process of analyzing, and determining what you want an account manager to sell, and then what you want a technology specialist to sell. And I would say where that got a little complicated was in 2006 in the Americas, due to almost a doubling of the product technologies from '05 to '06. And so that leadership team struggled in 2006.

I think we have really addressed all those issues in the last 100 days. We have basic -- we have mimicked what we did in Europe, which was solid and successful. And we now really have already been implementing that in the Americas with, I think, good, encouraging results.

And just one final question. On the fourth-quarter reconciliation numbers, there is a $0.09 other that you are including back into the numbers. I'm just curious if you would elaborate on what that "other" is.

Let me give you just a general answer, and if anybody would like more details I would be happy to take them through it after the call. But two primary factors. One is the share reconciliation between GAAP and pro forma numbers. And the second is a tax true-up related to the old Dexter pension plan.

Edward Tenthoff, Piper Jaffray.

Just to make sure I got the guidance clearly -- sorry to be so dense, but revenue growth guidance is based on -- is off of the 2006 base revenues excluding BioReliance?

Yes.

So that would mean that total revenues in 2007 will actually be down from 2006.

Yes, if you exclude BioReliance. Right.

As we look into 2007, what should we be thinking for gross margins for these two -- for the two divisions in particular, with a spinout of BioReliance?

I think that you should look at gross margins as they are currently running. We have talked about the improvements that we hope to make over the course of the year, which we think will increase operating margin in total by 100 basis points. [I] take the fourth-quarter margins and hope that we see some gradual improvement.

(OPERATOR INSTRUCTIONS). Bob Ai, Wall Street Access.

My question is for Dave. Dave, can you help me -- just walk me through again the bonus accrual in '06 and the guidance in '07?

Basically, the bonus accrual in '06 was around zero when it was completely reversed. So we paid no bonuses in 2006. In 2007, we expect to have a bonus accrual of about $7 million per quarter.

And what is the impact of that reversal of the bonus accrual in the fourth quarter?

There was no reversal in the fourth quarter. The bonus was reversed in the third quarter. So no impact of any kind in the fourth quarter of 2006.

But Dave, to reiterate, you expect cash flow from operations, free cash flow, to grow in line with our EPS guidance.

Correct. (multiple speakers) Well, actually, let me clarify it. Let me clarify the guidance. We're saying revenue is going to grow in the low to mid single digits. EPS will grow at two to three times are revenue growth. And free cash flow should grow in line with net income.

Paul Knight, Thomas Weisel Partners.

This is Jonathan Palmer in for Paul Knight. I was wondering if you could take us through the Sera business, how that performed sequentially quarter over quarter, and what dynamics changed at the end of the year?

I think it's covered in quite a bit of detail in the transcript, which should be available to you. And if there are any kind of follow-ups, we would be happy to take that off-line.

Okay, and one last question on the guidance. What was the revenue base number you gave for '06, excluding BioReliance?

It was $1.115 billion.

No, no -- 1.15.

Sorry, $1.15 billion.

Quintin Lai, Robert W. Baird.

With respect to some of the freight costs, have you been able to look at maybe passing on that to the customers? Or how does your competition kind of address those freight costs?

It's a great question. Let me explain the issue, is that we have a fairly set process of distribution and freight recovery in '05. When we got into a number of new product launches and the antibody business, obviously our offering really increased in size dramatically. The one thing that we wanted to provide customers was one box for a consolidated set of shipments to one location, if you will. And that is just the offering we're trying to provide clients. And so that really changed how we had to do warehousing, and then ultimately, consolidated shipments. That's one factor we had to deal with.

The second factor is that our online orders have really dramatically increased. And what we saw on online orders is that the average order size is smaller. So, like you would suggest, there is a fairly heavy freight charge with a single box or two being shipped out to a client.

Both of those factors happen fairly rapidly, and I would say that it has taken us a couple of quarters to understand the trend and what is going on, and that we are very much on it now and doing a lot of different things, both in terms of freight recovery, like you suggest, but then also streamlining the overall distribution process we have around the world.

The one thing that I would highlight is in a lot of the surveys we do, we're constantly trying to understand how reliable are we with our shipments, because we do try to have the broadest product range possible on the shelf ready to go for clients, without obviously having too much on the shelf because of the cash consumption. And we're doing very well in that regard, but now we have got to do it very well at a lower cost point. And that is the work being undertaken by what I would tell you is a very solid new team of logistic experts on board.

And then with respect to specialty media and the BioProduction side, any kind of visibility -- or has your visibility improved with the order patterns from customers? Because I know in 2006, you got caught with some lumpiness and quarter-to-quarter variability.

You know, we have seen in the second half the BioProduction Media come back very nicely. And we are expecting a good year in 2007 in BioProduction Media. And so I think some of this lumpiness and problems we saw in '06 are not going to be repeated in 2007.

Derik De Bruin, UBS.

So you are targeting 100 basis points of operating margin expansion in '07. I guess what is the base we're supposed use in 2006 in terms of -- to calculate that? What is the margin contribution to BioReliance (indiscernible)?

The baseline you should use is 60.2, which was the full year of 2006.

No, that's the gross margin -- I want the operating -- you said 100 bips of operating margin expansion.

Right. And then, as David said, 100 basis points improvement off 2006. And your question is, what is the level --?

Yes, what is the base level, assuming that we get rid of -- because it is going to be off of the -- is it off of the existing 2006 number with BioReliance in there, or without BioReliance?

Our guidance right now is with BioReliance in there for the full year.

All right. So we're going off of -- we're doing 100 bips off your current level.

Correct.

And I'm sorry -- you said you're using a 47 -- what was the share count again you're using for the full year on '07?

It's about 49 million.

John Sullivan, Leerink Swann.

Will you make any comments on the serum business as you look forward to 2007? You have asked us to consider your 2006 results while backing out that very volatile serum sector. Can you give us some guidance as to what you are thinking about for the serum business in 2007?

The overall Sera business will decline by about 10% in 2007. However, that is factored into the guidance that we provided you.

(OPERATOR INSTRUCTIONS). Edward Tenthoff, Piper Jaffray.

Just one other quick housekeeping question. The tax rate, David, that you mentioned was 30.5%?

30.9% (multiple speakers) that's where we ended this year.

Rick Patel, Lehman Brothers.

When you talk about low to mid single-digit revenue growth, could you provide a little bit more granularity as to how you expect BioDiscovery and Cell Culture Systems to play out?

We haven't provided that level of granular guidance. We don't want to go into any additional detail at this point. We will certainly provide more at the end of the first quarter.

And Bill, with that, we will -- that was the last question, right?

That is correct, ma'am.

Great. Then that ends our fourth-quarter fiscal year 2006 call. Thank you, everyone, for joining. And we look forward to next quarter.

Thank you very much, ma'am. And thank you, ladies and gentlemen, for your participation in today's conference call. This concludes the presentation, and you may now disconnect. Have a good day.