賽默飛世爾科技 (TMO) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second-quarter 2011 Life Technologies Corporation earnings conference call.

At this time, all participants are on a listen-only mode.

Later, we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions).

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Ms.

Eileen Pattinson, Head of Investor Relations.

Ma'am, you may begin.

Thank you, Shannon, and good morning, everyone.

Welcome to Life Technologies' second-quarter earnings conference call.

Joining me on the call today are Greg Lucier, our Chairman and CEO; and David Hoffmeister, Chief Financial Officer.

In addition, Mark Stevenson, our Chief Operating Officer, will be available during the Q&A portion of the call.

If you haven't received a copy of today's press release, you may obtain one from our website at lifetechnologies.com.

I want to remind our listeners that our discussion today will include forward-looking statements, including, but not limited to, statements about future expectations, plans and prospects for the Company.

We believe these statements are based on reasonable assumptions, but actual results may differ materially from those indicated.

It is our intent that these forward-looking statements be protected under the Safe Harbor created by the Private Securities Litigation Reform Act of 1995.

Additionally, we will be discussion GAAP and non-GAAP measures.

A full reconciliation of the non-GAAP measures to GAAP can be found in today's press release or on our website.

I will now hand the call over to Greg Lucier.

Thanks, Eileen and thank you all for joining us.

I hope you've had a chance to review the press release that we issued earlier this morning.

I will begin by reviewing our results for the quarter at a high level and provide our outlook for the remainder of the year.

Then I will turn the call over to David to walk you through our financial results in greater detail.

To briefly review the highlights, total non-GAAP revenue grew 4% for the quarter to $945 million and grew 3% excluding currency.

Non-GAAP earnings per share declined 2% for the quarter to $0.89 and grew 2% excluding the impact of currency.

Our organic road of growth was lighter than anticipated during the second quarter due to three main factors.

I'd like to spend a moment on each factor.

Before I do, I want to emphasize that we fully understand the issues, have detailed actions underway to address them and remain confident in our strategic and financial position, as well as the direction of the Company.

The first factor that impacted our growth is macroeconomic-based.

Consistent with what others in the life sciences tool space have seen, we continue to experience lower demand from academic and government funded researchers in the US and Europe.

If you recall, we also experienced this last quarter, particularly in the US, which we attributed to the uncertainty around funding caused by the delay in passing the federal budget.

Our expectations at the time were that once the 2011 NIH budget passed in mid-April, sales growth would return to normalized levels.

While we did see some improvement in demand at the larger, better funded accounts, the return to previous rate of growth in the US did not fully materialize as we had expected.

In Europe, budget pressures continue to impact demand, particularly on the United Kingdom and southern regions, which also lowered our growth through the quarter.

As a result of continued weakness in the funding environment in both the US and Europe, we experienced softer sales in many areas of our business in the second quarter, including instrumentation and basic molecular and cell biology reagents.

In total, we estimate that reduced funding in the US and Europe negatively impacted the growth rate of the Company by approximately 1.5 points on a year-over-year basis and also relative to our original expectations.

The second factor that impacted our growth has to do with the lingering effects of the earthquake in Japan, which delayed shipments of the 5500 high-throughput sequencer.

Our partner, Hitachi Japan, returned to full production in June.

Despite shipping over 170 5500 units, they were unable to complete all of the shipments that were planned for the second quarter.

As a result, several million dollars of revenue will now shift to the third quarter as we continue to clear that backlog.

On the consumables side, because of the delay in shipping instruments, next-generation consumables were down year-over-year as customers transitioned to the new 5500 platform and begin to ramp up the utilization of that platform.

We estimate the decline in consumable sales negatively impacted the growth rate of the Company by approximately 0.5 point.

The final factor that impacted our organic revenue growth in the second quarter was related to our business in China.

As you know, our China business has been growing rapidly over the last several years.

During this time, we have been heavily dependent on a local dealer network to market and sell our products.

In order to strengthen customer relationships, we took actions to optimize the existing dealer network and supplement it with our own direct salesforce.

As such, we have been hiring new sales representatives, order entry, technical support personnel to support this strategy.

As well as bringing on line much larger warehouse facilities across the country in Beijing, Shanghai and Guangzhou to better ensure product availability and faster delivery to our customers.

During the second quarter, we also placed a seasoned country leader in China who will manage the implementation of our growth strategy going forward.

All of these actions better position us to build a sustainable, competitive advantage and better serve our customers over the long term.

But it has not been without some short-term disruption.

In the quarter, we experienced reduced demand for parts of our dealer network as those dealers that will play a less prominent role in the future began to destock inventories of Life Technologies' products.

The result was a temporary slowdown in growth, which negatively impacted the Company's total growth rate by approximately 2 points.

In hindsight, we could've managed the transition better and notified the dealers over the course of a year versus the rapid change we chose.

However, we are here now and the good news is that the impact will be short lived and we expect the sales growth in China will return to historic levels over the next couple of quarters and we will have created a very valuable scientific salesforce.

So when we look at Q2 as a whole, it is clear that we faced some unexpected challenges impacting the top line, but we understand the issues, and some of which we can control, like China and some of which we can't, like government funding, but we are taking action to best position the business for the future against all of that.

As we turn our attention to the second half of the year, I will take some time to walk you through our plans and expectations.

We expect the second-half constant currency revenue growth will be between 3% and 5%.

The acceleration in growth from the second quarter will result from China coming back online with growth in the low to mid teens, as well as continued growth in the Ion Torrent franchise.

As you may have read in our recent press release, we achieved significant progress with the Ion Torrent technology over the last six months and expect that future growth will be fueled by new product introductions and expanded applications as the [relink] and throughput continue to increase off those semiconductor chips.

When looking at the macroeconomic environment, we do not expect the funding situation to worsen, but we are taking a conservative approach and planning for continued soft demand for both US and Europe government-funded research at least through the end of the year.

To mitigate the impact on our bottom line, we have taken a hard look at our organization and identified opportunities to increase profitability by further optimizing our cost structure and boosting efficiency.

We are accelerating a number of cost savings that were originally planned to begin later this year and next.

These actions will take costs out of the second half of the year and create a leaner organization as we enter 2012.

While the first half of 2011 was challenging, we have a strong plan in place for the second half of the year.

Our long-term strategies are intact and I remain confident in our prospects for the future.

We continue to lead the industry in innovative product offerings and see ample opportunity to accelerate revenue growth through solid execution in emerging and applied markets and delivering on the promise of next-generation sequencing, particularly ion semiconductor sequencing.

As we look ahead to 2012, we remain confident that we can deliver mid-single-digit revenue growth.

With the cost-saving initiatives I described earlier and the resulting margin expansion, continue to expect double-digit earnings growth into 2012.

Before I turn the call over to David, I am pleased to also announce that the Board of Directors has approved an additional $200 million share repurchase authorization.

We have approximately $300 million remaining on our previous authorization, so the addition of this $200 million will increase our total purchase authorization to $500 million.

In general, the timing and amount of the purchases will depend on quarterly fluctuations in cash associated with operating cash flow, capital expenditures and further debt repayment.

With that, I will hand it over to David to walk you through the details of the quarter and our outlook for the remainder of the year.

David?

Thanks, Greg.

Taking a closer look at divisional results for the quarter, the Cell Systems division non-GAAP revenue was $243 million, an increase of 5% over the same period last year.

Excluding the impact from currency, organic revenue grew 4% year-over-year.

Mid-teens growth in the BioProduction business was tempered by slower growth in other product areas, which were negatively impacted by continued funding pressures in the US and Europe and the temporary slowdown in China.

Molecular Biology Systems division non-GAAP revenue was $432 million, a decline of 1% over prior year.

Excluding the impact from currency, organic revenue for the division declined 2%.

Strong sales of qPCR consumables and molecular testing kits for applied markets were offset by slower growth in government-funded accounts in the US and Europe, as well as the temporary slowdown in China.

Genetic Systems division non-GAAP revenue was $265 million in the second quarter, an increase of 12% over the same period last year.

Excluding the impact from currency, revenue increased 11%.

Strong sales of the Ion Torrent PGM and the 5500 series Genetic Sequencer were partially offset by reduced demand for CE instruments, the result of slower growth in US and EU government-funded accounts, as well as reduced demand for next-generation sequencing consumables.

Demand for next-generation consumables is expected to pick up over the next few quarters as more 5500 units come online and utilization ramps up.

Ion Torrent sales totaled approximately $13 million, up 50% from the first quarter.

We are very pleased with this result given the price point of $50,000 per unit and the limited consumable sales we have had so far.

Regional constant currency revenue growth rates for the quarter compared to the same quarter of the prior year were as follows.

The Americas grew 3%; Europe 2%; Asia-Pacific 3%; and Japan grew 8%.

Moving onto other items, second-quarter non-GAAP gross margin was 64.2%, 350 basis points lower than prior year.

Higher price realization was offset by the negative impact of currency and mix.

Price realization in the quarter was between 1% and 2%, similar to prior years.

Mix was lower due to higher sales of both 5500 sequencer upgrades and the Ion Torrent PGM instrument.

The decline in gross margin was greater than our guidance due to the deliberate prioritization of upgrades over full-priced units during the quarter, resulting in higher sales of the lower-priced upgrades than we had originally planned.

Of the 350 basis point year-over-year decline in gross margin, approximately 300 basis points of the decline are due to items that are temporary in nature.

The bulk of the decline, approximately 160 basis points, is due to the impact of the 5500 upgrades, which we expect to be complete in the next two quarters.

Approximately 100 basis points is due to currency, including the impact of our revenue hedging program, which ends on July 31, and 30 basis points is due to sales of PGM instruments.

Margins on the PGM are expected to improve as the product ramps up over the next several quarters.

On a sequential basis, gross margin decreased by 210 basis points, primarily due to higher sales of the 5500 sequencer upgrades and the PGM, partially offset by increased productivity.

Second-quarter non-GAAP operating expenses were $344 million, an increase of 1% over prior-year levels and an increase of less than 1% on a sequential basis.

Operating expenses as a percent of revenue declined 120 basis points year-over-year and 170 basis points on a sequential basis.

The decrease in operating expenses was the result of careful hiring and control of other spending.

Non-GAAP operating income was $265 million, a decrease of 3% over prior year.

Second-quarter operating margin was 27.8%, representing a decrease of 230 basis points year-over-year.

The decline in operating margin resulted from lower gross margins, partially offset by lower operating expenses.

In terms of non-GAAP other income line items, we had $1 million of interest income, a loss of $4 million from currency and other items and interest expense for the quarter was $34 million.

Our non-GAAP tax rate was 27.9%.

Our diluted share count for the quarter was 184.8 million shares.

During the quarter, we repurchased approximately 1 million shares for $52 million and issued approximately 400,000 shares as part of the repayment of our $350 million convertible bond.

As a reminder, other factors impacting share count in the quarter are dilution due to our remaining convertible debt and employee stock options and restricted stock units.

GAAP diluted earnings per share were $0.52, which includes $0.26 per share of acquisition-related amortization expense, $0.03 per share of non-cash interest expense and $0.08 per share of business integration costs and other items, including costs associated with the discontinuation of a small productline.

On a non-GAAP basis, which excludes these items, diluted earnings per share was $0.89.

Moving onto the balance sheet and cash flow statements, our ending cash and short-term investments were $565 million.

This compares to last quarter's balance of $735 million.

The reduction in cash from last quarter is due to the repayment of the $350 million convertible bond.

Cash from operating activities was $204 million.

Capital expenditures were $17 million and free cash flow was $187 million.

Return on invested capital was 8.6%.

We remain on track to achieve our goal of 10% return on invested capital by 2012.

Our ending debt as of June 30 was approximately $2.7 billion.

This balance is made up of our convertible debt of $450 million and senior notes of $2.3 billion.

Now let me take a moment and talk about our revised outlook for the second half and full year.

Constant currency revenue growth, which includes the impact of acquisitions, is now expected to be between 3% and 5% for the second half with the third quarter at the lower end of this range.

For the full year, constant currency revenue growth is expected to be between 2% and 4%.

As of June month-end rates, currency is expected to have a positive 3 point impact on revenue in Q3 and a positive $0.05 impact on earnings per share.

In Q4, currency is expected to have a positive 3 point impact on revenue and a positive $0.06 impact on earnings per share.

Operating margin expansion is expected to be down 100 basis points year-over-year in the third quarter, resulting from a year-over-year decline in gross margins due to higher-than-planned sales of 5500 upgrades in the quarter.

However, operating margins are expected to expand by approximately 50 basis points for the full year.

For modeling purposes, it is important to note that the majority of our operating margin expansion will come in the fourth quarter due to the timing of cost reductions planned in the second half.

As a result of calling the $350 million convert in the second quarter, interest expense for the year will go down.

Interest expense, net of interest income, is now expected to be $128 million for the full year.

Other income and expense, which include foreign exchange gains and losses, is expected to total $10 million in expense for the full year.

In total, other income and expense is expected to be approximately $138 million.

The second-half tax rate is expected to be approximately 28%.

Average diluted sharecount for the year is expected to range between 185 million and 187 million shares.

This estimate does not include the impact of any additional share repurchases in the second half of the year.

While it is not our normal practice to provide quarterly earnings-per-share guidance, we recognize the potential difficulty in modeling this quarter.

Therefore, non-GAAP earnings per share for the third quarter are expected to be between $0.85 and $0.90.

The impact of our reduced revenue outlook will be partially offset by the acceleration of the cost-savings initiatives that were discussed earlier.

As a result, we expect to deliver non-GAAP earnings per share between $3.70 and $3.80 for the full year.

Full-year free cash flow is now expected to be in the range of $625 million to $650 million for 2011, including $100 million of one-time restructuring costs.

Restructuring costs have increased from our original estimate of $80 million due to additional restructuring actions that are now planned for the second half of the year.

Looking ahead to 2012, with restructuring largely complete, we expect free cash flow to increase in line with net income growth.

And with that, I will hand the call back over to Eileen.

Thanks, David.

We will now turn to Q&A and we ask that everyone to limit themselves to one question and one follow-up question.

If you have additional questions after that, please get back in the queue.

Operator, we are now ready for the Q&A portion of the call.

(Operator Instructions).

Tycho Peterson, JPMorgan.

Good morning.

Maybe just starting with maybe an obvious question on the academic markets.

You are pretty consistent with a lot of your peers in calling out the academic softness.

Can you give us a sense as to whether this really is a transitory issue?

Obviously, we have the dynamic of stimulus rolling off as well, so if you could just talk about how much you think could kind of linger going forward and then maybe also just touch on your ability to grow in a potentially flat NIH environment going forward.

Well, as I said in the comments, we believe that this growth rate or reduced growth rate will continue through the end of the year.

In terms of visibility beyond that, we are not sure yet, but we are thinking it is going to be in the certainly lower single digits based on what we can see right now.

Now the second half of your question is how can we grow in the face of that.

I think it comes back to both our product mix, our geographies and then continue expanding into these non-academic markets.

And so on the first one, it is clear more and more money is going towards next-generation sequencing and we are very bullish on now with the 5500 coming finally online and the Ion Torrent ramping up considerably.

So we think we have the right exposure there.

You heard by my comments in terms of China, we are taking some pretty rapid and pretty bold actions in terms of becoming ever more direct across the region, emphasizing China here, and we think that will give us some growth rate.

And then finally, our HID businesses, our food, our animal health businesses, give us some non-academic exposure.

And then maybe with regards to sequencing, since you mentioned the 5500, you have obviously had success with the PGM.

How do you feel like SOLiD fits into the portfolio longer term?

Is there a risk that, with these delays, and obviously the introduction of desktop systems, that SOLiD potentially could be in kind of decline going forward?

This is Mark Stevenson.

So we still see a place for the 5500 in the market, and it is seeing some adoption in terms of accuracy and its flexibility.

But as you rightly point out, there is an increasing part of the market now that is growing very rapidly in these desktop-type systems where people really value this fast turnaround time.

So as far as the sort of further growth of the market, we really see it in this decentralized part of the market, more and more labs that we visit who today might be buying some of our qPCR instruments now are growing quickly with the Ion Torrent.

And then last one for Greg maybe, are you able to put any parameters around kind of the cost-saving actions for the back half of the year and are those kind of facility closures or just talk to your ability to kind of pull costs out of the system?

This is David.

I will take that.

Right now, we are looking at savings in the range of $10 million to $20 million in the second half of the year and so on an annual base run rate, that would be $40 million to $50 million.

Okay, thank you.

Quintin Lai, Robert W.

Baird.

Good morning.

The slowdown that you saw, it looked like it was -- a lot of it also was in the Molecular Biology area and so, Greg, you kind of talked about people switching over to next-gen sequencing.

I mean is it taking traditional molecular biologists and now they have just become gene jockeys or is it really just funding issues and maybe people sitting on their budgets?

A little bit of color on the Molecular Biology side.

Was it consumables, was it instrument-based, kind of what were you seeing?

It's a good question.

Let me give you a couple impressions we have right now.

So clearly, there is this shift towards sequencing in terms of the funding.

I think our response to that is that ever more researchers are taking a genetic analysis perspective.

And as Mark rightly pointed out in the last answer, when you could start selling a sequencer for $50,000 and a qPCR instrument, a higher-end one sells for about that as well, you are now faced with trade-offs and I think you're starting to see that take place.

So more prospectively though, we actually think this plays quite well into our portfolio in that there is a continuum of you will sequence and then you will validate the gene function.

And so we are seeing really incredible double-digit growth in our assay business, the consumables side of our qPCR business, and so getting that right mix kind of oriented is a big body of work that Mark and his team are working on right now.

So those are the impressions we have.

That is how we think it will all play out for us in that the consumables side of qPCR will have really robust growth over the coming years as it is evidenced today.

You have given preliminary 2012 guidance of mid-single-digit growth.

So what is implied in the assumption for the academic market and kind of your visibility to that?

I think we are thinking right now it is essentially flat to 2011 and that is how we are planning our cost structure.

So then that means that the growth then has to come from pharma in emerging markets, in applied markets in order to offset the flatness in academic in US?

Well, yes, and then also changing your mix inside those mature countries.

Thanks.

Doug Schenkel, Cowen & Company.

Hi, good morning.

My guess is based on the way Ion Torrent has been tracking in the early going that you're banking on probably about 2 points of growth from that product next year.

You typically get about 2 points of price.

So your 2012 guidance, recognizing that things may be a little stronger or a little weaker for both of those variables, but your 2012 guidance implies, on the surface, that you are expecting very little volume growth.

When you factor in new products, which I think we should given how much you are spending on R&D, it suggests that your existing businesses are going to continue to decline.

Where is my math wrong and if it is not, why would you make that assumption?

Doug, let me just clarify.

So in terms of the pricing environment, we typically get between 1% and 2%.

So I think you chose the high end of that side of the range.

Ion is contributing considerably to growth and we expect that trend to continue, but mid-single-digit growth in 2012 takes into account a number of scenarios, including the tougher academic funding environment in both the US and Europe and we felt it prudent to provide a range that encompassed a number of different scenarios there.

Okay.

All right.

Well, let me ask I guess a high-level question about what happened in this quarter.

There was an investor event where you seemed to signal that there was weakness in early May and then you went out of your way to say that things were fine.

You reported a number that I think some would argue warranted a preannouncement.

The issues you've pointed to seem like they shouldn't have been surprising.

The Japan earthquake obviously happened last quarter.

The funding environment has been tough since last quarter and your choice to make changes in China was your choice.

Many are going to say that there was a total breakdown in communication and that, at best, you lack visibility on your businesses.

There has been a series of missteps here.

How do investors regain confidence in this team and that you've finally got the outlook right?

Well, let me take a first stab at that, Doug, since I was the one that made the comment at the investor meeting.

And the question I believe at the time was -- do you think that the uncertainty around the passage of the NIH budget will have an impact on your Q2 results?

And my comment was that it already had an impact at that point in time since the budget wasn't passed until mid to third week of April, so into the second quarter.

What we wanted to clarify was, that being the case, we still thought at that time that once the budget had been passed, that spending in the academic and government accounts would pick up and that the impact on the second quarter would be neutral or spending would recover.

And we had some feedback from large accounts at that time that said that they were spending at the rate that they had been when fully funded.

What we discovered as the quarter progressed is that that wasn't the case, particularly in some of the smaller and less funded accounts.

And particularly at the end of the quarter when we received some of our larger instrument sales, they just did not materialize.

So that is what happened there.

In terms of the earthquake, you are absolutely right, the earthquake happened in the first quarter.

And we are working with our partner, Hitachi, to get it online -- get production back online.

What we and they believed at that time was that they would be operating at full capacity and could meet our demand, which was 200 plus instruments.

They did a great job.

We actually placed 170 instruments, but they weren't able to produce all 200.

And that was cause of the shortfall in terms of revenue.

And we made some specific decisions about -- since we were going to come in short -- to place upgrades as opposed to new instruments and that had an impact on our margins.

And then, finally, in China, China is, as Greg said, we made a decision to supplement the dealer network, which has served us very well there with a direct salesforce.

We announced it.

We identified some of the dealers or the dealers that would be with us long term and some of them that we were going to deemphasize and that had an impact on our revenues as they started to destock.

As Greg said, in hindsight, maybe we could have managed that better, but hindsight is 20/20.

It is what it is.

We know what the issues are and we are working to correct them.

Additional questions?

Nandita Koshal, Barclays Capital.

Thanks.

I was wondering if, Greg, you could break down the second-half guidance and maybe the 2012 outlook a little bit by subsegment, and then if we could get your thoughts around some of the larger pieces of those businesses like the PCR franchise or the research CEs?

I will defer to Eileen to give a bit more granularity on guidance, whether we do it on this call or in subsequent calls, but, as I have said earlier, when we think about how we grow in the future, there is clearly a product mix opportunity as more funding go towards sequencing.

And within that trend, as Mark highlighted, we see more and more money flowing into this economical approach to desktop sequencing and that leverages Ion Torrent.

We also see good opportunity that, as all those sequences get done, they have to be validated and we are the number one consumables company in the world for that type of technology with our qPCR consumables business, so that should be good.

And we also then see continued growth across these emerging market regions.

Look, China has been a very strong performer for us.

We had a momentary 90-day blip here.

It will be another great performer for us starting back up again in Q3.

So China, Latin America, India, those places will also give us good incremental growth.

So that is our general thinking right now and then underlying all of that, we have just got to make sure the organization is ever more lean and efficient.

As we highlighted, we are taking actions to do that as well.

So that is how we are thinking about the business.

The Company is strong, generates enormous free cash flow.

It is very profitable and we will get through these kind of periods of time.

Thank you.

And in the CE business specifically, you talked about a bit of a slowdown.

Is that really more just macro funding-related or are you seeing those accounts increasingly trial the Ion Torrent machine and maybe wait for some of the other lower-cost sequences that are coming to market?

Just trying to get a sense for the outlook for the research CE business specifically.

Look, there is no change in the research CE business outlook from what we have given before.

In fact, in the quarter, the consumables part of that franchise was very good for us, so a lot of confirmatory testing going on on the CE instrument.

More and more people are realizing that it has to be, and is the gold standard for validating the sequences that were just done on these next-generation machines.

So in the research side, again, I don't think we see a lot of growth going in terms of new instruments, but we see good growth from the consumables and virtually all of the growth in CE instruments is into molecular diagnostics, into forensics, into animal herd testing, all these different applied markets.

Greg, I really appreciate that.

And if Eileen can give us some of that breakdown, I don't know if it is for now for the follow-up call, but thanks for the help.

Yes, so Nandita, we probably won't provide any further breakdown of the guidance that we just provided.

We provided more detail than we normally do in terms of EPS for Q3 and revenue growth for the second half and in 2012, it is still early days for us to break down our guidance any further than what we have got.

Understood.

Thank you.

Ross Muken, Deutsche Bank.

Good morning, guys.

As we think about kind of what has transpired in the business, and sort of the outlook for the rest of the year and then obviously you gave some initial color on '12, I mean how should we think about your long-term view of growth here?

And then putting that in context of kind of the repurchase that was announced because I guess to your point before, Greg, this business generates a ton of cash, the valuation is obviously quite impaired and there is obviously some degree of confidence on your end in the context of kind of returning the Company to the historical growth that we have seen.

So $200 million on a buyback, even though you now have $500 million all in, seems relatively small given the cash flows.

So one, talk about sort of your confidence and the view of this sort of long-term strategic growth of the business and then how you thought about sort of sizing that versus kind of the share repurchase.

Well, in terms first of the confidence in the future, I wanted to convey that, as a public company, you report every 90 days and I think there is a tendency to trendline a 90-day result forever.

And so I would ask investors to step back for a moment and that choices were made in China as an example of our distribution strategy, had a 90 day impact and now we will be back to mid-teens to higher growth.

That would have really demonstrably changed our growth rate and financial bottom-line results in the quarter.

My point simply is I think it is really critical that we take a steady hand through these periods and so that is why I can give some confidence that we say, look, this is going to be a mid-single-digit grower as it certainly was in 2010 and all the years before.

And so we think we will get back to that here by the end of the year going into 2012.

So that is my kind of general qualitative comments around the confidence of the future.

In terms of the buyback, we get a lot of those questions, Ross and we have been I think historically a good provider of buybacks, of returning cash to shareholders and we will continue to do so in the future.

At the same time, I want to make sure that we keep full financial flexibility as we move through the next couple of quarters.

And the reason is that I just want to see how the economy unfolds as I think my goal is to be a good steward of this Company over the long term.

And so before we go spend what some investors would like is a much bigger buyback, I think it is important that we hold onto more of our cash resources and just make sure that we are understanding everything going on around us in the world.

So that is the long and short of it.

We may have bigger buybacks in the future, but right now, it is $200 million more, which is not an insignificant amount of money.

I think, Ross, the only thing that I would add, maybe a little more specificity around Greg's comments on growth, one of the things we tried to do was provide some of the details on some of the headwinds that we faced in the quarter.

Our growth in the quarter was 3% and there are -- other than the funding, the two main issues were the upgrades and the China situation.

The upgrades accounted for 0.5 point of growth and China we estimate was 2 points.

So if you assume, give us the benefit of the doubt that we will correct those situations, that adds 2.5 points to our 3 and so you are at 5.5 points of growth at that point in time.

And that is where we are saying, even with a tough or no improvement in the funding environment going forward, we are looking at mid-single-digit growth.

I think the other thing I would say is we are looking at our cost base and if we face slower growth, we will take a look at our investments and our costs and adjust them accordingly so that we can continue to deliver double-digit earnings growth.

Just a quick follow-up to that point, David.

So in the context of the forward outlook, not for just this year, but into next, you noted you think the funding environment will be similar to what we see this year and I think I am in agreeance with that.

I think we get another continuing resolution.

That being said, in the event that the environment is sort of worse than what we are expecting, from that standpoint, how do you think about flexibility in the cost structure?

Where do you see greater waste?

Is it on the SG&A line?

Do you think the R&D as a percentage of sales is kind of the appropriate level given the returns you are getting there?

Just trying to get a sense for where we have got the most degree of flexibility.

Yes, I think it is not so much a case of waste, is that there is just opportunities for us to continually fine-tune and improve the way that we operate the business.

And I think that, as I have said before, we have opportunities on multiple levels.

We are continuing to consolidate our manufacturing footprint.

I think we have six plant consolidations underway currently this year or announced and we are accelerating our productivity improvements in the plant, as well as looking at our manufacturing and operations overhead.

So I think you will see definite improvements and we can drive additional improvements on the cost of goods line.

I think on a slower growth environment, we will certainly take a look at our R&D spending as a percentage of sales, particularly as we have now completed the introduction of the 5500.

There is opportunities for us to re-allocate and reduce our R&D spending.

And then finally on SG&A, we are taking -- we are continuing to look at opportunities there, which we have captured significant opportunities since the merger.

And as I have said to people before, I think we have got the two companies put together, but we have by no means fully optimized at this point.

And so we are looking at things like continuing back-office consolidations, improving the way we go to market and refining the amount of money that we spend on promotions and how we do that and so of the $10 million to $20 million that I think we can get out of the business in the second half of the year, I think those are the three lines that I would look at.

Perfect.

Thanks, guys.

Amit Bhalla, Citigroup.

Hi, good morning.

Greg, I wanted to know if you could just dig a little deeper into the Cell Systems business.

I know you talked about the strength within BioProduction, but there are a number of other lines within Cell Systems that I would like to get a little more color on.

Well, as you know, the buyer production business had another good quarter and building off a fantastic year last year.

So we are in a good place there with that business.

That was about a 13% organic growth rate in the quarter.

We also see continued good mid-single-digit growth in the cell analysis portfolio, dyes, antibodies, things of that nature.

So that is going okay.

And then there are other areas that I think are under more pressure just due to funding issues that are experiencing kind of lower mid-single-digit growth.

So overall, good franchise.

In fact, we probably want to orient more of our business into Cell Systems in terms of organic growth and product development.

So that is a color commentary.

And Greg, in terms of China, I think I heard you say two different things.

In the prepared comments, it sounded like you said that the China piece would resolve itself over the next few quarters, but then I think in the Q&A you are talking about a 90-day turnaround.

Can you put some numbers around how many dealers were moved around and what is the actual timing to get back on track?

Yes, so we think, in the third quarter, maybe just kind of make it the second half, the business will be in the mid-teens growth again and then moving into 2012, it will actually go higher than that, like it had been in 2010 and prior to that.

So you almost could draw a line that the business declined a bit in the first quarter, declined a little bit more than in the second quarter and now we have actually already started to see it return back in the second half of June, now into July and August.

So again, I would just say to investors, being a public company when you report every 90 days, you have got to deal with these interim results like this, but I don't make a trendline out of this one.

This is a conscious decision we made to change the distribution strategy.

Obviously, there would be some disruption.

It is more than we thought, but it is now coming back online and we are absolutely certain we've made the right decisions to build a larger scientific salesforce across that country.

So again, I think we will be back on track here right now in this quarter.

[Could you turning] over half of your distributors, 90% of them?

Just some rough idea would be great.

I am not going to signal that because I think it is competitive information.

Okay, thanks.

Jon Groberg, Macquarie.

Hi, thanks for taking the question.

I apologize for my voice.

It was gone yesterday, but hopefully you can at least hear me a little bit today.

I just had two questions.

One, a little bit more detail on the Genetic Systems business.

Maybe you can let us know on Ion Torrent kind of what you are seeing on consumable usage at this point and what you expect.

And then on the 5500, people that do some diligence talk to customers because of Ion Torrent and seeing that that is where you are investing.

They are choosing not to invest in SOLiD anymore, are canceling orders or moving to competitive platforms.

So maybe just what you are seeing on the cancellation front from 5500 as you think about your 3Q guidance.

Yes, so, firstly, on the Ion Torrent consumables, really most of the revenue at the moment is still coming from the instruments themselves as people just start to install, get up and running the instruments.

As we go forward and you would have seen in the Gordon Moore paper, I mean you can go through thousands of chips to run a genome and as we launch now new chips, the 316 chip, more applications come into that looking at doing whole genomes expression and going into now the 318 chip that we will launch in the fourth quarter.

So we will see more consumable usage going on and that will drive some of the growth and also improvement in margins.

With regard to the 5500, we've certainly seen the adoption of the desktop sequencer and the performance improvement has caused people to look again at Ion Torrent.

And we will certainly see some of the shift in the market as people look for different applications of next-generation sequencing.

And so some of our users have decided to go in that direction.

The vast majority of our existing SOLiD users have actually decided to upgrade their systems.

So we have given customers that choice and as we continue to roll out the 5500s, we have seen good uptake.

I'd say the vast majority have upgraded into the 5500.

Some decided they wanted to do other projects and come to us with Ion Torrent.

Jon Wood, Jefferies.

Hey, thanks a lot.

Just philosophically, does the constant -- when you guys say constant currency now, should we assume that mid single digits next year, it is possible that that number includes some bolt-on transactions, more tuck-in type transactions rather than a true organic number?

No, that is a true organic number.

Okay.

And then Greg, philosophically going forward, that double-digit number in '12 and then out in the future, do you contemplate any capital redeployment in that number or is that effectively an EBITDA growth number?

That is an EBITDA growth number.

Okay.

Last one for David, understanding your comments on the cash flow, why wouldn't free cash flow grow ahead of net income next year if there is restructuring charges that dissipate, if you will?

So going from $100 million to some lower number, why doesn't that kind of drive free cash flow premium to net income?

It could potentially.

Okay.

All right, thanks a lot.

Dan Arias, UBS.

Yes, thank you.

Just staying on the academic funding environment, you have said and we have assumed that those doing more cutting genomics work stand a better shot at seeing grant approvals in a pressurized funding environment.

When you talk to customers right now, do they, at this moment, actually share this optimism or are they being as guarded as everyone else right now just given the magnitude of the overriding issues?

Mark and I can frick and frack on that, but clearly they are being guarded.

As somebody earlier said on a question, the stimulus is receding, is very uncertain coming out of Washington any decisions and so people are being very guarded.

At the same time, there is this underlying trend that there is more grants going to genetic research, and I would say that the Ion Torrent technology, which is incredibly economical versus these very large expensive machines that we have seen in the first next-generation cycle, are going to be tougher to purchase for these people.

And so the Ion Torrent is really receptive to the moment, to the times.

I would just add, it remains obviously a competitive granting process and we see around the world that people want to get in published papers and just doing that work in thousands of labs around the world, you now have tools that you can do a lot of genetic discovery without sequencing and write great papers.

So I think that is the trend that we are seeing that then draws funding into it and great labs are getting money.

Okay, thank you.

And then just on consumables pricing for the PGM, the 314 chip was just reduced to under $100.

Do you see ASPs following this pricing path as each chip is surpassed by a next-gen product?

Yes, I mean we are really able to leverage the power of semiconductors here.

So as we come in with higher performing chips, we are able to leverage the volume we get, the ASP follows the pricing we are doing and just allow you to do more price per data point for our customer.

As we look to further increase applications around that, you will see some different ASPs on some of the future kits around this, but certainly we have seen good update of the -- really 10X improvement that we are giving every six months to customers at the same price point.

So the 316 giving customers a speck of 100 megabases, they are actually getting more than that in their hands and at the same price point that they were out of the 314 chip.

So it is very well received by our customers.

I think it will drive volume up with more applications.

Great, thanks for the questions.

Operator, we have time for one more question.

Isaac Ro, Goldman Sachs.

Hey, guys, thank you for taking the questions.

You talked a lot about the funding environment, recognizing it is very uncertain.

I just want to think about how we should look going forward on the sensitivity of your current guidance on marginal shift if funding should in fact be down in the US going forward.

And then maybe if you could add some color around how your assumptions differ domestically, as well as maybe in Western Europe.

Well, as I said earlier, our current guidance, our current outlook assumes essentially a flat funding environment.

So in terms of what a downside case would be, I don't think we have that modeled in per se and we will have to see how this all plays out.

In terms of Europe, we don't see any improvement happening there either, but we have resized the business there accordingly as we indicated that the second quarter of last year and it is kind of playing in line with what we had predicted at the second quarter in 2010.

So I guess the bottom line is, just to reiterate, we see US and Europe being about the same as it is in the second quarter.

Our longer-term forecast is a flattish academic sector.

But within that sector, we are seeing a shift to this genetic research and given dollars are pressured, it is benefiting these kind of desktop sequencers that are very simple and low cost to use.

So that is a little bit of what we can predict so far.

Yes, I appreciate that.

And then just as a follow-up on China, you mentioned some of the transitions you are making operationally there.

Can you maybe help us tease out where you think the normalized growth rate is for that market going forward so that when you guys are back in a position to harvest opportunity, we can get a sense of the relative change from what we saw this quarter?

Yes, I think it is in the 20%s and we have certainly -- we did that last year in 2010 and as we have gone through the first half of the year to change our strategy, we haven't achieved that.

But as I guided, in the second half, we will get closer to that again and in 2012, I think we will be fully back on line at that type of growth rate.

Got you.

I appreciate it.

Thank you.

This concludes our second-quarter earnings conference call.

If there are additional questions, please feel free to contact me.

The webcast will be available via a replay on our website for three weeks.

Thank you again for joining us this morning.

Ladies and gentlemen, this concludes today's conference.

Thanks for your participation and have a wonderful day.