Sigma-Aldrich Earnings Call NUGGETS: Projecting Strong Growth in Hitech, Hedging Strategy
On Tuesday, Sigma-Aldrich Corporation (NASDAQ:SIAL) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Projecting Strong Growth in Hitech
Jon Groberg – Macquarie Capital: I’ll offer my congratulations to Kirk and also welcome Quintin. So, if you can – I mean obviously, can you maybe just start off Rakesh on the outlook, again a little bit because it sounds like, you can correct me if I’m wrong, and I know there is lot of different ways to size the business, but it sound like Research you now expect low single, no real change to SAFC from what you’re forecasting before, and it sounds like most of that delta from first half or second half is driven by the Hitech business, so is this about Taiwan plan coming online. So…
Rakesh Sachdev – President and CEO: …ask SAFC?
Jon Groberg – Macquarie Capital: And SAFC, yeah. So, can you maybe just help us understand given your comments around China and just given the uncertainty I guess, on the macro and the pricing dynamics you mentioned. Just help us get comfort around that Hitech business really being able to drive that growth in the second half?
Rakesh Sachdev – President and CEO: Sure. So, first of all, yeah, again, the only change that we have made on our guidance is we are expecting Research to be a little softer than what we said a quarter ago. And so, we’re saying we probably expect Research to perform similarly, as we did in the first half. Now on SAFC, really the strength is coming not just from Hitech, the strength is also coming from Bioscience. Bioscience did not grow in Q1, it grew slightly in Q2, but it has, I think tremendous tailwind in Q3 and Q4. So we’re going to see very strong growth in our Bioscience business in the second half of this year. We are also going to see a very strong growth in Hitech, and we are pretty comfortable. We started the shipments from our Taiwan facility in the second quarter. We have decent visibility on the growth. As I said, pricing has come down. We expected pricing to come down as the capacity was put in place. That was in our plans. But so far everything that we see, Bioscience and Hitech will be strong growth drivers of our SAFC business in the second half. In our pharma business, the Contract Pharma business had just a terrific quarter, this in Q2, this is where we are doing our high potency compounds for our customers. That business grew almost 40% in Q2 after growing double-digits in – so, we are seeing strong growth. I expect the pharma business to also post very strong growth in Q3. So, across the board, it’s the type of businesses we are in, frankly that is causing SAFC to grow so strongly. Also, our Supply Solutions business, which is part of SAFC, grew stronger in Q2 than Q1, and we expect that growth to be even stronger in the second half. So, overall, we are pretty encouraged about what’s happening in SAFC.
Jon Groberg – Macquarie Capital: On the restructuring in the Research, can you maybe just give a little bit more detail about what you are doing there to restructure?
Rakesh Sachdev – President and CEO: Yeah. So, on the restructuring we have announced certain closures of some sales offices in Europe. We are actually consolidating into a few of the larger countries. We have consolidated certain positions that’s allowing us to reduce our headcount over the course of this year. I would say, probably half of the cost reductions are through headcount reductions and office closures. The other half is probably some of the spending that, especially non-consulting and other stuff that we will take down through the balance of this year. In terms of what we can expect, what will be recurring as we go forward, clearly we would see at least half of that to stay with us recurring as we go out into the future years.
Tycho Peterson – JPMorgan: My congrats to Kirk as well. Just to start off with one for Jan, I’m just wondering if you can talk a little bit about your priorities as a CFO and if you see any changes may be to things like the hedging strategy. I know the Company has also talked about getting the tax rate down about 200 basis points, so can you talk about some of your initiatives?
Jan Bertsch – EVP and CFO: I think Peter, clearly one of four strongest initiatives for the finance group as total is really supporting the business and our strategy as we go forward and profitably grow the company. I think on the FX side, I had mentioned previously when I came into the Company that one of my focuses would be on, you know, working here to try to make sure that we put an appropriate hedging strategy in place where we can try to mitigate some of the risk associated with profitability and we are moving down that path I think in a very solid direction. We’ve really began focusing on some of the key currencies for the Company which clearly is the euro, the yen, the pound etcetera and we have – are just about to put our pilot program in place here. One of the key items really was getting our arms around all the cross currency implications for the Company because it’s pretty complicated structure and we’ve spent a lot of time doing that. I think we’re on target and we plan to become more active in that and launch our plan later this year. Then, the other side, on the tax side, we had indicated previously that we expected about a 200 basis point improvement in our tax rate beginning in 2013 and we are very much on target to achieve that as well. So, we’ll see the tax rate coming down a little bit in the second half of this year and then starting next year continue on that trend and we should be achieving that 200 basis points throughout the year, next year and going forward of course.
Tycho Peterson – JPMorgan: My last one, maybe back to Rakesh on M&A. Can you talk a little bit about your thought process here? You’ve obviously been talking a little bit more about doing deals more broadly? How should we think about size? Should we expect other deals like BioReliance or will it be smaller tuck-ins and any commentary you can make on kind of the maximum leverage ratio and any targets or hurdles that you would look at in terms of ROI that you can communicate?
Rakesh Sachdev – President and CEO: Yeah, I think for the most part the acquisitions that we continue to look at are bolt-on acquisitions. Really, I think most of the ones that we’re looking at are smaller than the BioReliance acquisitions, but that’s just the nature of the industry. Would we consider something bigger? It would have to make strategic sense as I said, but I would say a lot of work that we’re doing are smaller tuck-ins and we continue to look at those. We have ample room in terms of when we look at those types of acquisitions, to be able to do that really without affecting our debt-to-cap and a lot of things that we do look at is, in all these acquisitions is what is the return on invested capital that we are likely to get, when we make these acquisitions. And how quickly can we get ROIC accretive. And that has been significant focus on this Company, as you know our ROIC is fairly impressive. And as we look at these acquisitions, even though the multiples that we have to pay are pretty high and might cause some early dilution of ROIC. We are very, very focus making sure that we not lose sight of that long-term.
Tycho Peterson – JPMorgan: And how much your cash is offshore, right now?
Rakesh Sachdev – President and CEO: I would say, most of it is offshore, today.