Good day, ladies and gentlemen, and welcome to the Second Quarter 2010 Life Technologies Corporation Earnings Conference Call. My name is Diana, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Ms. Eileen Pattinson, Head of Investor Relations. Please proceed.

Thank you, Diana, 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; and Bernd Brust, our Chief Commercial Officer, are 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 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. I'll now hand the call over to Greg Lucier.

Thanks, Eileen, and thank you, all for joining us. Coming off the heels of our Investor Day just a few weeks ago, we are going to keep our prepared comments short this morning. So let's get started. As you can see from our results, we delivered another quarter of strong top and bottom line growth. Revenue grew 6% organically to $906 million, 8% excluding the impact of H1N1 sales in 2009. Operating margins expanded by 290 basis points to reach a record 30.1%, and earnings per share grew 15% to $0.91 for the quarter. We are pleased with our results for the second quarter in the first half of the year, which are a reflection of the fundamental strength of the business and the essential nature of our product offering. I'd like to extend my thanks to our teams around the world for their commitment to excellence and relentless focus on execution. As I do every quarter, I'll take a few moments to talk about these results, give you an update on the integration and provide some color on the strength of our end markets. First, we continue to be very focused on the integration, and I'm pleased to report good progress towards our goal of putting actions in place that will generate $175 million in annual synergies by the end of 2010. In the second quarter, we continue to execute on an integration plan, including the placement of over 50 dual-branded supply centers around the world and further optimization of our combined eBusiness platforms. We are seeing good traction from these efforts and achieve new records for the number of the total transactions, both in North America and globally, that will process through eCommerce channels. In terms of synergy capture, these actions, as well as many others, will generate…

Thanks, Greg. This quarter, revenue grew 8% to $906 million. Currency had a positive impact of 1.5 percentage points on reported revenue growth. And acquisitions and divestitures contributed half a point to growth. Excluding the impact from currency, acquisitions and divestitures, revenue grew 6% organically. Genetic Systems had revenue of $235 million, representing 7% organic growth. Sales of CE instruments, including the new 3500 Genetic Analyzer and sales of CE consumables to research and clinical labs, grew in the mid-single digits. This was partially offset by a year-over-year decline in CE instruments and consumables sold into the applied markets, as this business experienced a difficult year-over-year comparison due to the Japanese police order received in 2009. Customer feedback on the SOLiD 4 and ECB platforms continues to be very positive. As a result, the Next-Generation Sequencing business demonstrated strong double-digit growth during the quarter. At this point, approximately half of the installed base of SOLiD 3.5 instruments has been upgraded to the SOLiD 4 platform. Molecular Biology Systems grew 2% organically to $434 million in revenue. Excluding H1N1-related revenue, organic growth was approximately 6%. Growth was driven by strong results in the Genomic Assays and Molecular Biology Reagents businesses. Demand for Genomic Assay products grew in the high-single digits. The Molecular Biology Reagents business grew in the mid-single digits and benefited from strong double-digit growth in Asia-Pacific, particularly China. Cell Systems had revenue of $230 million representing 13% organic growth with strong demand across the portfolio. Double-digit growth in bioproduction was driven by continued improvement in demand from European and North American pharmaceutical customers, as well as the timing of large orders. The Dynal Beads business also benefited from an improvement in pharma, biotech and clinical diagnostic end markets, resulting in double-digit growth for the quarter. And lastly, our Primary…

Thank you, David. A quick note before we get started. Recently we've received feedback from a number of you that one-on-one calls are preferable to the post earnings Q&A call. For this reason, we will not be holding a post call today. If you have questions following this call, please contact me directly. We have about 30 minutes for Q&A, so I would like to ask everyone to limit themselves to one question and one follow-up question. If you have additional questions that you'd like to ask, please get back in the queue. Operator, we are now ready for the Q&A portion of the call.

[Operator Instructions] And the first question will come from the line of Quintin Lai, Robert W. Baird.

Greg, could you give a little bit more color on what you're seeing, I guess, in Europe? I mean, it sounds like the spending slowed as delay of release of funds. What kind of visibility do your customers get in terms of when some of those funds will be released? And then, kind of, what's the long-term forecast for Europe, given the fact that those are big research mandate that was just put forward in terms of 2011 budgets?

I think what we saw in the second quarter was a reaction to the heightened sensitivity around the whole European fiscal crisis. And so that seemingly had a ripple effect through spending at the bench level on a company like ours towards the end of that second quarter. Now that's kind of a short-term reaction, and that's why our comments are that, perhaps that could persist a bit through the second half of the year. On long term, the second half of your question, it's unclear, but our opinion is that this side of government funding will probably remain intact. And it centers around what you said in that, the larger countries are committed to a agenda of innovation. And therefore, at least in their public pronouncements that we can understand, they have said they're going to ring fence innovation funding, and so again, we rely on that to say that over the next couple of years, the European business should do okay. So that's what we know at this point. We're not predicting dire consequences, and yet at the same time, we think the robust growth we saw in the last couple of years may be modulated a bit over the next couple of years.

The improvement that you're seeing in U.S. pharma, is it broad-based or are you seeing maybe increased growth from companies that have completed some of their recent M&A activity?

What we've always seen in that pharma sector is an account-by-account variability. And so our top accounts are not always our top accounts year-over-year. It just changes depending on their own particular spending or situation they find themselves that may be due to an integration. So overall, we're certainly seeing, in aggregate, a nice recovery. But the individual companies and their respective growth rates has changed this year versus last year.

Next question will come from the line of Doug Schenkel, Cowen.

First, in Molecular Biology Systems, that seems to be an area that some folks are pointing to as a blemish on an otherwise good quarter. By my math, when you strip out the impact of H1 [H1N1] in Japan, and I think you highlighted this, you did 6% organic growth in the quarter. I just want to make sure that this was consistent with your expectations given the comps and make sure that nothing is changed regarding competitive landscape or the environment relative to where you were in Q1. And then the second question kind of related to organic growth, David, if you mentioned this I missed it, but could you just talk about how H1 versus H2 compares organically when you strip out all the one-timers that you mentioned for the first half and the second half?

Doug, on the first part of your question, your math is correct. The Molecular Biology business had organic growth around 6%, and you have to remember that's a very large franchise. So that's 6% on a big number. So actually, I think the results were very robust actually, and I think it also is indicative that we continue to invest in Molecular Biology. Respective in one of those segments in the PCR franchise, we have the broadest product offering by far. We have millions of assays available on demand, and it really is the standard that people continue to come to more and more. So we feel very good actually about the Molecular Biology results, so I'm glad you clarified that. David, on to you in terms of the second question Doug asked.

Yes. So Doug, so just let me repeat in terms of what was the impact on H1N1 and the other onetime items on our results for last year and our second half results. So H1N1, we had $15 million of revenue per quarter last year. Another major item was the Japanese Police order, and that was approximately $8 million to $9 million per quarter last year. And then finally, we had stimulus revenues in the second half of $15 million, and that was $5 million in the third quarter and $10 million in the fourth. That answer your question?

Yes, it does. I mean, I guess part of the reason I asked this is there has been some concern in the quarter with some other companies that organic growth optics don't look good and that organic growth is actually slowing down in the second half. I'm just doing a quick math based on those headwinds, which frankly, you did outline last quarter as well, so those are nothing new. And I want to make sure my math is correct that when you strip the headwinds out of the first half and then you strip headwinds out of the second half, it actually looks like, even though you're guiding organic growth to mid single digits in the second half, that it actually looks like things are accelerating in the second half if you strip everything out. Is that the right way to think about things?

That is correct. We don't anticipate any significant change between the first half and the second half.

The next question will come from the line of Tycho Peterson, JPMorgan.

Maybe just first question for David on kind of the margin improvement, and understanding your comments about kind of the third quarter and how you're going to be reinvesting. Well, can you talk a little bit about how much of what you're seeing here is sustainable? And I asked because I know at your analyst day, you highlighted a lot of productivity initiatives and you highlighted things like non-refrigerated TaqMan reagent and things that seemingly should have a nice impact on margins going forward. So can you talk about kind of the sustainability of manufacturing productivity? And I don't know if you can quantify how much this quarter came from price versus royalty versus some of those productivity enhancements.

Yes. Yes, I mean, you're absolutely right, Tycho. We did talk at Investor Day a lot about this. Nothing is changed. We continue to expect to get 50-plus basis points of operating margin improvement over the next several years. So we believe that the changes that we make are sustainable, and that we've got further improvements that we can make. In terms of the impact of price, we continue to get price improvement that is in line with what we've had in the past, and we're averaging one to two percentage points of price. And it has, through the upheaval in the economy over the last couple of years, not changed, and we're seeing that same type of improvement this year.

I mean, from this quarter, the 100 basis points you saw, can you break out how much was from price versus other factors?

I can't do that right off the top of my head at this point.

Maybe then just a follow-up for Greg on SOLiD. As we think about the launch of hq later this year and then obviously the PI at the lower end, could you talk a little bit about where you're seeing interest from customers in terms of core academic centers and then the non-traditional markets for SOLiD?

You bet, Tycho. I have Mark Stevenson here with me. I'll let Mark answer that in more detail.

Yes, Tycho. So we continue to see uptake of genome centers, the smaller genome centers that are getting into this, particularly in the area of cancer where we see the accuracy that we get with the SOLiD System, really an uptake in that one. People want to do those kind of experiments. You saw some of the announcements we've made and some of the uptake in some of the cancer centers both here in North America and in Europe during the last quarter. And we expect, as we launch the SOLiD PI, we'll broaden that base and with the hq, bring the cost of the genome down even further and so continue to see good progress into the market with the SOLiD technology. We also mentioned in the script a very good feedback on the EZ Bead, which is taking away. One other thing important to our customer and the workflow is much more simple and straightforward upfront sample preparation now with that EZ Bead System.

Can you talk about Bioproduction? You called that out as being strong. How sustainable are the trends there, and kind of what you're visibility to the back half of the year for that business?

We feel good about the Bioproduction business. Again, it's account-specific. But the macro environment for us, we continue to see uptake across that, and have actually broaden our portfolio there with the introduction of more assays and products into the Bioproduction area as they continue to see that's a good market for us.

Derik De Bruin, UBS Securities.

So just to follow up on some of Quintin's questions on the funding environment. There's also, obviously, been a lot of concern from amongst people about what happens in the U.S. following the midterm elections. And I guess, what are you looking at now in terms of what are you hearing on the NIH budget in fiscal 2011 and the initial take on fiscal 2012? And I guess, what are your embedded expectations in terms of budget increasing?

Here's what we currently believe, that the NIH budget in 2011 will probably be up by about $1 billion if the House Appropriations recommendations hold. So over the next 12, 18 months, funding should be pretty good. Into 2012, I think it's a bit more uncertain. But potentially, the NIH could be flat to slightly down. Inside of that though I will tell you that a lot of our work is preparing around where the money would be spent, because it won't just be everything 5% or 3% or flat. There will be changes in how the funding actually gets spent, and we certainly saw this earlier in the Bush administration and I think we learned pretty smartly on how to navigate that. So again, the next couple of years then because of, at least stimulus, the 2011 NIH budget being probably okay and growing, and then the changing and funding towards where we see real strength in our portfolio, the next couple of years should be okay in United States.

Thanks for the color on the FX impact for next year. I guess when we start thinking about where your hedges are in place, what's the euro-dollar number that you kind of got -- the exchange you kind of have the hedging blend [ph] so we can kind of watch that?

You're talking about next year?

Next year, yes.

Well, I think we need to go through the second half of the year before we know what our rate is going to be. But we'll provide that, obviously, when we talk about our outlook for next year.

And you had given some general rules of thumb. I'm looking at the impact of currencies on EPS for this year, a 10% move has you -- I think you said it was a $0.06 impact or something like that. It's like, I guess, would those same types of rule of thumb hold for these next hedges, or is it that bar has reset?

Bar has reset.

And the next question will come from the line of Marshall Urist, Morgan Stanley.

First question, just more -- I know there's been a lot of questions about this, but maybe to take a step back and just kind of talk about how does Life grow and what are the strategies for growth if, given the exposure to academic, market and government funding broadly as we think about that for the long term, if it is a flattish funding environment. How do you guys think about growth opportunities? Do you deploy capital differently? Sort of what's the strategy, and how are you thinking about that?

Well, first of all, about 30% of our portfolio is in what we call the broadly applied biology segment. So Forensics, Bioproduction, Animal Health, and those segments are growing very fast, and we see them continuing to grow as a percentage of the portfolio. So that's a good thing. Second, in terms of academic funding over the next couple of years, I think if you take my earlier comment, we think it's going to be okay. It's probably more of the funding environment we saw in the 2003 and '04 type of time frame, and we actually grew okay through that period by really focusing the portfolio on where the money would be spent. And I think that a very important point to be made is that all products aren't equal, and the funding does get directed then in a certain way and you just simply have to have the portfolio to capture it. So I think we're feeling pretty good that we'll be able to do well in the overall funding environment in the U.S. and Europe. And then lastly, importantly, is the geographic aspect, which is, we have built a very robust infrastructure across Asia. And I think you can see the benefits of that investment by our continued very strong growth across Asia. We are direct in a lot of the main countries. We're going ever more direct in all of the countries. We're building logistics centers across the region. And so geographically, we're exposed to where higher growth will be. So when you couple all of that together, Life Technologies will do fine over the next couple of years.

I know you guys had talked about, with the convert out of the way, starting a buyback program. And obviously, free cash flow will start to inflect in 2011. So would just be curious as we kind of move past this, maybe you could give your kind of updated high-level thoughts on -- are buybacks likely to be the major use of capital in this $350 million over two years. So is that how you guys are thinking? So is that going to be the major strategy, or is there more opportunities on product tuck-in acquisitions?

I think our philosophy and our plans for use of cash are unchanged. Our number one priority is to pay down our debt. And as we've said many times before, target is to get and remain within a leverage ratio of 2 to 2.5x EBITDA. Second point that you bring out is we're going to continue to invest in the business organically and inorganically. And then third, our philosophy on excess cash also remains the same. We intend to return that to shareholders. A primary vehicle that we've used is share repurchases, and we will continue.

Your next question will come from the line of Jon Wood, Jefferies & Co.

So David, you will be within your target leverage ratio next week, correct, when you pay out the convert?

Actually, there are a variety of ways of calculating the leverage ratio. So the one we've most often use is our credit agreement, but each of the rating agencies also have a calculation. Moody's, for example, is slightly different than ours. That's why we're saying that by the end of the third quarter, we will be within our target leverage ratio for all of the rating agencies on all of the calculations and anticipate to begin the buyback then in the fourth quarter.

And then on the cash flow statement, can you just disclose the divestiture proceeds from the mass spec [mass spectrometry] JV, and then talk about whether you've paid the taxes yet on that proceed number?

That's a good question, Jon. Why don't we get the answer to that, and we'll have a follow-up conversation with you on it.

Your next question will come from the line of Jon Groberg, Macquarie Capital.

So just one quick question for you Greg. You've often talked about one of the strengths of the portfolio is that it's not that price-sensitive, and in terms of when you tried lowering prices, it hasn't really stimulated a lot of demand and that's why you get some price -- a lot of good pricing ability. Then I'm just curious, specifically within the PCR portfolio, have you tried that overtime? I'm just curious, there's been some, obviously, a lot of announcements around people trying to get more into that business. I'm curious just you view of how effective price is as a mechanism in the PCR space.

I think what gets highlighted is in that particular space, there's a lot of the very low end reagents and otherwise. And actually, they've always been around, at least for the last several years, kind of the low end of that segment. We have products from that segment as well. So my comments really still pertain globally to this business, that the relationship between price and volume is not a direct connection. And that's due to a lot of the friction of publications, previous experiments. There's just inertia to switching. And when you have market leadership like we certainly do in the PCR business, people are inclined to stay with their products, and so we benefited from that.

Your next question will come from the line of Steven Lichtman, Oppenheimer & Co.

First, I was wondering the update on single molecule, still expecting to have a beta launch here towards year end?

Yes, we still, as we updated at the Investor Day, making good progress in developing the system and continuing to engage with customers around the early access and discussing the experiments and applications that they see for single molecule sequencing.

And then on CE, certainly seemed like it's picked its head up here a bit more than expected. Is it really driven by the launch of the 3500? Anything else in the sort of end markets you can comment on relative to CE?

The CE, as we expected with the launch of the 3500, that really goes into markets such as the clinical testing market. We have the CE-IVD mark. Recently, we launched assays that start to go into that like a BRAF assay. And so we see that uptake falls forward into that CE space. In addition in the Forensics space, launching more kits, more geographic expansion. And they see franchise is robust in that segment, continues to be the right technology choice for those applications where you have a couple of genes that are very variable that you want to analyze.

And the last question will come from the line of Tony Butler, Barclays Capital.

David, is there any way to characterize the revenue synergies in the quarter that you may be seeing with the combination of the companies?

Would you like to talk about some of the -- I think sources of revenue synergies would be helpful.

Sure. In the revenue synergy sources, we touched on a few in the earlier comments around combined supply centers, leveraging our combined website. When you look today at the portfolio, where many of these types of sources were purely tied to one of the companies, they're now combined. Our selling organization has been restructured where commercial teams we have consumables, sales reps have carried both the AB [Applied Biosystems] consumables as well as former Invitrogen consumables. It gives our instrument teams more time to focused on -- focusing on instrument placements. And so all of those combined, they have driven many of the synergies that we have indicated in our earlier calls.

And this concludes the question-and-answer session. I'd like to turn the call back to Eileen Pattinson for closing remarks.

Thank you. This concludes our second quarter earnings conference call. If there are any additional questions, please feel free to contact me. This webcast will be available via a replay on our website for three weeks. Thank you again for joining us this morning.

And ladies and gentlemen, again, this does conclude today's conference call. Thank you for your participation. You may now disconnect, and have a great day.