Sigma-Aldrich Earnings Call Nuggets: Current Guidance and Leverage Expectations

Sigma-Aldrich Corporation (NASDAQ:SIAL) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Current Guidance

Amit Bhalla – Citigroup: Rakesh, I just wanted to ask you first question on guidance. I’m just trying to reconcile your organic guidance versus the 6% to 7% we’ve heard you talk about in the past. I think you’ve said that, if you grow the 3% organic that you did ’12, 1% of price, no longer headwind, the Applied markets could give you a point and emerging markets could give you another point. That’s how you laid out in the past getting up to 6% to 7%. Can just walk us through that versus what your current guidance is for 2013?

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Rakesh Sachdev – President and CEO: As I said, we bridged 6% to 7%. I think there are couple of fundamental things that have to change for us to get to that 6% to 7%. Our Research business right now is growing in the very low-single-digits. So, I think, we have got our game plan. That’s half of our Company. And as we lay our plans, I think, that growth is going to move up by 1% or 2%, it’s a combination of what we’re doing in the emerging markets. I think as we’re adding more content into our pipeline, into the Research business, that’s going to add more sales growth. But that’s going to give us an additional growth. We are cautiously optimistic of driving up our Applied market growth as our Applied markets are right now growing mid-single-digits. I think our own internal plans are obviously to grow much faster than that and I’m pretty confident with the plans that Frank and his team and all of us are putting together that’s going to give us some additional growth. The SAFC business has been subdued. We grew only 5% in 2012. We expect this business to grow in the high single digits and I know that we had a setback because of some pricing issues in the Hitech business, but with the orders that we’ve begun to see in our custom Pharma business and the SAFC business, the high single-digit growth that we’ve been consistently seeing in our media business, there is no reason why we won’t get return back to the high single digits in our commercial business. So, when you look at the slightly improved growth in Research that we should get, going back to the high single digits in our commercial business and then getting increasingly better in the Applied markets, we get back to the growth rates that we have talked about, the 6%, 7%.

Amit Bhalla – Citigroup: Rakesh, just a follow-up on the SAFC, here I’m just trying to reconcile getting to that high single digits, your order book this quarter grew 2% and quarter-to-quarter it looks like it has been slowing. So, if your order book is in the low to mid-single digits how are you reconciling getting to that high single digits for 2013?

Rakesh Sachdev – President and CEO: Yeah, I won’t read too much in the order book. It really fluctuates. Like even, at the end of January, we are up quite substantially, on report at the end of Jan. What I would say is that, If you look at the SAFC business today, the new commercial business, half of that is Life Science products and Life Science products is industrial cell culture business and pretty much our high potency Custom Pharma business, that business has been growing in the very high single digits and we don’t see that changing. The Life Science services business which is maybe about 25%, that’s where BioReliance is, that’s where we do the services. That business is also going to kick up growth. The real issue we have had really has been the Hitech business which grew in the very low single digits in 2012 because of the pricing issues. We have seen double-digit volume growth, but in terms of because of the price we only saw very low-single-digit revenue growth in sales dollars, and that’s going to comp-out. So, once the Hitech business start showing good growth, we will get back to the high-single-digits in Commercial business.

Leverage Expectations

Dan Leonard – Leerink Swann: So, on your expectations for some leverage in the business in 2013, I am having a little trouble if I use the high end of your guidance to get to the high end of the EPS range given without decremental leverage given that your tax rate is going to be lower and you are going to have higher sales. So, can you walk me through that?

Rakesh Sachdev – President and CEO: If you look at the full year we can try and – we said low to mid sales growth. That’s somewhere in the – I am saying in the range of 3% to 5% growth and if you look at that and you apply that we are going to get at least about $0.14, $0.15 from the growth in the business. Our SG&A is probably going to be higher in 2013 because we are applying some money back. We are going to get some pricing. I would say between pricing and volume and mix, we probably get at least another $0.30 from this year. We are probably going to see some benefits from tax rate as well, that’s maybe another $0.05, $0.06, I believe, that’s the number. And we are going to have little bit of SG&A headwinds, but we will try and offset that with some productivity.

Dan Leonard – Leerink Swann: I guess to clarify, you do expect operating margins to increase in 2013 as part of guidance from 2012 levels.

Rakesh Sachdev – President and CEO: We do. As I’ve said, we expect the operating margin in a normal year to go up about 50 basis points, that’s typically what we planned for and there are some years where we reinvest some of this margin back into some of the things we’re doing. This year we are going to be making more investments in new SAP systems. We are also investing ahead of the growth in some of our Applied markets. So, yes, we do expect a modest expansion whether we will deliver the entire 50 basis points or something less, that depends on what the investment opportunities that we see over the course of the year.

Dan Leonard – Leerink Swann: Then my follow-up question. The acceleration in organic growth that’s baked into the high-end of your guidance. What are the primary one or two drivers behind why organic growth would accelerate from 2012 levels?

Rakesh Sachdev – President and CEO: I think there are several things that we’re doing in each of the businesses that give us more confidence in growing. I think in the commercial business, we’ve been getting increased orders in our pharma grade business. So, we clearly see that in the second half of the year. We have some orders that we have from customers that will give us more oomph. I would say, that there are also comp issues. The pricing issue in the Hitech business will be less in the second half of the year. I think the pharma business as we just said, also the headwinds are becoming less from a comp standpoint. We have some other things that we’re doing with customers that gives us a little more confidence that the second half we will get better orders and we will grow our sales.

A Closer Look: Sigma-Aldrich Earnings Cheat Sheet>>