Piedmont Lithium Inc.
Q2 2011 Earnings Call Transcript

Published: 11 Mar 2011

[Operator:]

Welcome to Pall Corporation's Conference Call and Webcast for the Second Quarter for Fiscal 2011. [Operator Instructions] We'd like to remind you that the company's second quarter press release is available at www.pall.com. Management's remarks this morning will include forward-looking statements. Please refer to Slide 2 or request a copy of the specific wording of this qualification of the company's remarks. Management also uses certain non-GAAP measures to assess the company's performance. Reconciliations of these measures to their GAAP counterparts are included in slides at the end of the presentation. At this time, I will turn the call over to Mr. Eric Krasnoff, Pall Corporation's Chairman, CEO and President. Please go ahead, sir.

[Eric Krasnoff:]

Yes, thank you very much. Good morning. Before we begin, I'd like to extend my concern and our condolences to the citizens of Japan after the horrific earthquake and tsunami. And we wish them the best, and we'll be helping however we can. Now I'm pleased to be here today to review Pall's second quarter results. Thank you for joining us. Joining me are Lisa McDermott, our Chief Financial Officer; and Frank Moschella, Corporate Controller. Also joining us today is Ken Frank, who leads the BioPharmaceuticals, Food and Beverage and Laboratory Groups under the Life Sciences umbrella. Ken is the lead architect of Pall's expanding presence in the BioPharmaceutical markets. He'll share with us his perspective on how Pall is steadily becoming the supplier of choice for a broadening range of total fluid management requirements. Lisa and I will review some of the details and drivers of the quarter and update you on our outlook for the balance of the year. And following that we, of course, look forward to your questions. Pall's execution of its strategic growth initiatives continues to yield positive results. The strong top line, coupled with Pall's deeply ingrained productivity improvement culture, drove consolidated gross margins up to 51 1/2%. Operating margins continued their upward trend, reaching almost 18% in the quarter. And with the global economy now improving, we see significant opportunities for sustainable revenue and profit growth to further drive value creation for our shareholders. And so we are pleased with our overall progress this year and confident on capitalizing on the opportunities ahead. First quarter -- first half results demonstrate Pall's market and geographic strength and the power of our productivity initiatives. We were strong out of the gate in the first quarter, and the second quarter results are even better. Second quarter sales of $645 million is about a 15% local currency increase over last year and follows on Q1's 12% performance. Exchange rates were slightly negative on the top line in the quarter. Revenues increased by double digits in Life Sciences and Industrial. Growth was broad based by market and geography. The BioPharmaceuticals and Microelectronics market, in particular, outperformed our expectations in the quarter. So did Industrial in the Western Hemisphere, where every market was strong collectively, growing by more than 40%. Life Sciences continued to perform well. The top line grew 14%, following up on a 10% increase in Q1. Operating margins also improved. In the first quarter, Pall Industrial grew 14% on the incoming tide of economic recovery. Second quarter sales increased almost 18%. Industrial's gross margins jumped 280 basis points, reaching 47 1/2%. Operating profit more than doubled from a year ago. Now on a geographic basis, both Pall Industrial and Life Sciences grew in all regions. The Western Hemisphere was strongest, increasing 27%, and that was led by the 42 1/2% growth in Industrial. We're gratified to see Europe return to double-digit growth after its string of economic woes. It grew almost 11% on broad market strength. Sales in Asia were also up double digits, about 10%. Overall orders kept pace with sales, increasing 15%. Every major market but Municipal Water was solidly positive. Orders for consumables are the leading indicator for Pall's business, and they grew almost 13%. You could look at them as an analogy to the retail market where same-store sales are an important indicator. For us, it's consumables. The backlog of consumables and systems is up 23%. Now bear in mind, this includes orders for both consumables and systems that won't ship this year. The emerging regions that we have been focusing on, that's Latin America, Eastern Europe, MENA, China, India and the Southeast Asian areas, now represent about 20% of total Pall sales. With the current Middle East situation, it's important to note that Pall's sales for the countries in turmoil are not significant. We do see considerable long-term opportunity in the region, particularly in the energy and water markets. By their very nature, these markets transcend politics, and so we remain optimistic about Pall's prospects. With that, let's look at the sales details, starting with Industrial. Sales overall, as I said, increased about 18%. Aeropower grew close to 12% in Q2. Energy and Water were up 21%, with growth in all markets. And MicroE grew over 21%. That's its fifth straight quarter of double-digit growth. Within Aeropower, Machinery & Equipment posted double-digit growth for the fourth quarter in a row, up 15%. Sales increased 24% in the Western Hemisphere, 18% in Europe and almost 6% and Asia. The global mining in primary metals markets remain in high gear, and other parts of the market were also strong. Q2 orders were up almost 22%. Aerospace sales grew 8%. Orders increased over 22%, with strong demand from both submarkets. Now looking at those markets, Military Aerospace was flat overall, while the Western Hemisphere, the largest part of the military market for us, grew 20%. Shipments were tied to a variety of military programs, including the Joint Strike Fighter and spares for the U.S. government. Commercial Aerospace grew 17% in the quarter, with strength in all regions. Growth was aided by some inventory restocking for airline support and a modest increase in aircraft build rates, including the private jet market, which is finally reviving. Energy and Water sales increased 21% on solid performance from all markets. Orders grew in line with shipments. Fuels and Chemicals returned to growth in the quarter, with sales up 6% despite lagging large capital system sales. Growth is driven by the Western Hemisphere at 32% and Europe at 26%. And it's reflecting production of oil, gas, chemicals and polymers. All markets have an improving economy. Asia was down 20%, largely reflecting core capital orders from last year. Globally, consumable sales increased 15%. This is the third quarter in a row of consumables growth after four quarters of double-digit decline. Power Generation sales increased over 16% on strong growth in the Western Hemisphere and Asia. Key growth drivers were essentially the same as in Q1, that is water treatment systems for U.S. power generation stations and continued expansion of the wind turbine market in China. Europe remained weak due to ongoing challenges in the turbomachinery area and from reduced demand for power tied to industrial production. Municipal Water sales increased over 80% in the quarter. This remains a U.S.-centric business for now, although the opportunity is decidedly global. Sales in the Western Hemisphere more than tripled, as municipalities continue to upgrade to membrane filtration to comply with regulations. Europe has been weak, but orders for the last three quarters increased by double digits. Public financing issues endemic to the region have been putting the shackles on new orders for municipal projects, so the increase in order volume is encouraging. Overall, backlog in Municipal Water stands at over $100 million. Now as we said each time oil prices shoot up, high oil prices are both a challenge and an opportunity. The challenge is to offset their impact on operating costs, which we endeavor to do. The opportunity comes from customers motivated to reduce energy consumption by extending the useful life of process fluids, and it comes from refiners looking to maximize production and also from alternative energy developers and producers with filtration-reliant technology to become more economically attractive. Now let's move on to Microelectronics. They reported their fifth straight quarter, as I said, of double-digit growth, increasing over 21%. All regions and key customer markets grew. Growth continues to reflect high capacity utilization rates at chip producers as well as demand for products like smartphones, tablet computers and other advanced electronics, with LED technology as key contributor. We do not expect these very high rates of growth to continue. They should normalize as production catches up with underlying demand and as the comps get tougher. We expect a relatively flat second half of the year, followed by a pickup in calendar 2012, as major investment programs of chip producers unfold. Orders, which have been up sharply for five quarters, this time increased just under 10%. With that, let's move on to the Life Sciences business. Here, sales increased 14%, with Medical up 3%, Food and Beverage, 7 1/2% up and BioPharmaceutical growing almost 24%. Medical grew modestly in all regions, while blood filter sales, which represents a little bit more than half of our Medical business, were flat. The next two largest submarkets, OEM and Hospital Critical Care, were up. Blood filter sales grew about 2% in the Western Hemisphere despite an estimated 4% drop in blood collections. The OEM submarket grew almost 7%, driven by strong demand for IV filters in the Western Hemisphere. The Hospital Critical Care market had a strong quarter with sales up almost 15%. This growth came largely from Europe, where standards governing point-of-use water filtration are more embedded than they are in the United States. We also got a boost in sales as Pall-Aquasafe filters were deployed in response to outbreaks of waterborne illness, primarily Legionella. In Food and Beverage, sales were up 7 1/2%, with consumable sales up 4% and all regions contributing. System sales increased 25%, with both results reflecting continued recovery in the market. As further proof, orders in F&B were up almost 18% in the quarter. Several game-changing new products are taking hold, and I'll just comment on one of them today. That's the PROFi membrane system for beer production. The brewing industry is beginning to shift to membrane filtration from filter aides like diatomaceous earth or DE. DE is old technology with a number of problems, including worker health and process consistency. It's messy to work with, costly to dispose of and it's a known carcinogen. So breweries are transitioning to Pall's disruptive technology because it is more efficient, effective and environmentally friendly. A large PROFi system as might be used at any of the 1,200 large breweries in the world can sell for several million dollars. And more significantly, it can generate $500,000 in annuity sales each year. Now there's another 4,000 midsized breweries that are also potential candidates for our smaller version of the PROFi technology. Now since our first quarter call with you, President Obama signed the Food Safety Modernization Act into law. According to the White House blog, this historic legislation directs the Food and Drug Administration to build a new system of food oversight focused on applying the best available science to prevent the problems that make people sick. Regulation typically benefits Pall's business, and we have every reason to believe this ultimately will as well. It's already creating interest in our new GeneDisc system for rapid microdetection of food pathogens. And finally, let's move on to BioPharmaceuticals, and I'll try not to steal Ken Frank's thunder here. Quarter two was another very good one for BioPharma. Revenues increased some 23%. Consumable sales increased 19% and system sales more than doubled. All regions were strong, with the Western Hemisphere and Asia leading the way at 36 1/2% and 30%, respectively. Europe, which is our largest region, posted 14 1/2% growth in the quarter. This was its best performance in some time. Pharmaceuticals grew by 25% and Lab had another good quarter with almost 15% growth. Q2 sales were positively influenced by the timing of stocking orders by some customers in Asia and large chromatography sales in the Western Hemisphere. Overall, orders in BioPharmaceuticals increased about 11% driven by orders for consumables, which grew 13 1/2%. Orders for systems, which can be quite lumpy, decreased. The backlog is still healthy, and at the half year mark, sales in BioPharmaceuticals are up 19%, with consumables growing 16 1/2% and systems up 17%. This growth is coming from all regions. And now, Ken Frank will speak to us and tell us why this business that represents over a quarter of total sales continues to perform so well. Ken?

[Kenneth Frank:]

Thank you, Eric. Good morning, everyone. It's a pleasure for me to be here today to talk about Pall BioPharmaceuticals, which is a key growth driver for Pall Corporation. The market of biologics, including biotech drugs, vaccines and plasma derivatives, continues to grow and is a key focus of our BioPharmaceuticals business. About 60% of BioPharmaceutical sales are from the biologics market, our fastest-growing market. It is important to recognize that these quarter sales figures are not just a result of the last 12 weeks work, not even the last 12 months. It is a direct outcome of the continuing execution of our key strategies that we've been working on for the last several years, I believe last outlined to you during Investor Day back in December 2009. Our strategy is based on three elements

[Lisa McDermott:]

Thank you, Ken, and good morning, everyone. I'll start by recapping Pall's financial results for the quarter. Net earnings in the quarter were $75.7 million or $0.64 per share. This compares to $49.6 million or $0.42 per share last year. Pro forma earnings per share as defined on Slide 26 were $0.68 compared to $0.42 per share, an increase of 62%. Net earnings in the six months were $147.1 million or $1.25 per share, and this compares to $116.6 million or $0.98 per share last year. And pro forma earnings per share were $1.29 compared to $0.82 per share, an increase of 57%. Now foreign currency translation increased earnings per share by $0.01 in the quarter and six months. This is an anomaly given the detriment to the top line that Eric mentioned earlier. And this reflects the combined strength of Asian profits and the impact of Asian currency translation to profitability there compared with the effect of the weakening euro on European profit. Sales increased 15% in the quarter and 13% in the six months compared to the same period in fiscal 2010. Foreign currency translation decreased the top line by about $3 million or about 1% in the quarter and by about $11 million or about 1% in the six months. Local currency sales were up almost 16% in the quarter. Consumable sales increased 13% and systems were up 47%. In the six months, local currency sales grew 14%, reflecting a 13% increase in consumables and a 21 1/2% increase in system sales. Overall, pricing gains contributed approximately $4 million to the top line in the quarter and over $7 million in the six months, an improving trend. Gross margins in the second quarter improved 80 basis points compared to last year to 51 1/2% as an improvement in Industrial was partly offset by a decline in Life Sciences. Gross margin in the six months increased 120 basis points to 51.3%. And I'll provide some color on this by business in a moment. SG&A was 30 1/2% of sales in the second quarter, down from 33.4% last year. In the six months, SG&A expenses were 30.3% compared to 32.8% last year. These improvements reflect top line leverage and tight cost controls and easily overcame the added expenses of going direct in some territories, as Ken mentioned before. Excluding the estimated impact of foreign currency translation, SG&A expense increased about 6 1/2% in the quarter and 5 1/2% in the six months year-over-year. Approximately 1/3 of the increase in the quarter and 40% year-to-date relates to the investments we've spoken about before such as the cost of building up our European and Asian headquarters, the implementation of our global ERP system and investments in emerging regions. The remainder of the increase in the quarter and year reflects inflationary increases in payroll, as well as increases in selling-related variable costs. Excluding the estimated impact of foreign exchange, R&D spending rose about 13% in the quarter and 16% in the six months. We expect it will be just under 3 1/2% of sales for the year, and this is a plan to ramp up in investment for new products. Turning to income taxes, the effective tax rate or as reported rate for the six months was 27% as compared to 20.8% in the same period last year. Excluding the benefit from the favorable resolution of certain foreign tax audits last year, this represents a sustainable reduction year-over-year in the tax rate of about 4%. And this is in line with our forecast. The reduction has contributed about $9 million or $0.08 to the bottom line so far. The full year forecasted rate of about 27% reflects tax benefits associated with the establishment of our European headquarters and puts us solidly on track to achieve our 2013 goal of 24% to 26%. Now net interest expense in the first half of last year also primarily reflects the benefit related to the resolution of the foreign tax audits I just mentioned. And this resulted in the reversal of accrued interest of approximately $9 million. Including this item, net interest expense increased by approximately $1 million, driven by slightly higher average interest rates and average debt levels throughout the quarter compared to the same period of last year. In December, we issued $205 million of commercial paper at just about 1.2%, including support costs. This is about 1% lower than the borrowings under our new revolver, which were repaid with the proceeds from the commercial paper issuance. So at January 31, we had $170 million of outstanding commercial paper and no borrowings under our revolving credit facility. Looking at our performance compared to the first quarter of this year, sales in the second quarter increased sequentially about 7%. Life Sciences grew 7%, driven by 11% sequential growth in BioPharmaceuticals. Industrial grew by about 6% sequentially, and this was driven by a growth of approximately 25% in Energy and Water and was principally systems driven. Quarter-over-quarter, gross margins improved by 50 basis points, and this reflects improvements in both businesses. In Life Sciences, this principally reflects favorable mix whereas Industrial, manufacturing cost savings drove improvement sequentially, offset by negative mix. Now SG&A increased 7%, excluding the impact of foreign exchange, to 30.5% of sales in the second quarter compared to 30.1% in the first. And this reflects annual increases in payroll, which primarily occur in the second quarter, and annual grants of certain restricted stock units, which also occur in the quarter, higher expenses of variable-based compensation and depreciation on the investment on our global ERP system, as more locations went live in our second quarter. Now I'll provide some color on segment performance. As mentioned previously, Pall Industrial sales growth was 17.7%, reflecting a 14 1/2% increase in consumables on strength in all markets. System sales grew by about 40%, primarily driven by Municipal Water. Systems represented about 15 1/2% of sales compared with about 13% last year. We expect mid single-digit growth in the second half in Pall Industrial. This reflects our expectation that Microelectronics, after five consecutive quarters of very high growth, will be flattish in the second half of the year, year-over-year. Pall Industrial's gross margins in the quarter improved 280 basis points to 47 1/2%. This reflects three key factors

[Eric Krasnoff:]

Excellent report, Lisa. Thank you very much. We've carefully positioned Pall to benefit and even outpace the economic recovery. Our first half results attest to the demand for Pall technologies and solid execution of our growth plans. They gave us added confidence to raise our full year guidance. We believe that the global economy will continue to improve, albeit not always steadily. Our strategic plan is crafted to yield sustained revenue and profit growth and drive further value creation for shareholders. Now we've covered a lot of ground this morning and appreciate your patience. Before getting to your questions, I do want to address an important issue, and that's the status of the search for my successor. The board has formed a search committee, retained a leading executive search firm and that search is officially underway. The board is working diligently to identify the right candidate to build on Pall's leading position. I can assure you also that I am fully engaged in the business and focused on maintaining our strong performance and momentum. And now with the help of the conference operator, we look forward to your questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Tracy Marshbanks from First Analysis.

[Tracy Marshbanks:]

After that quarter, the toughest question may be what went wrong or did anything go wrong, but very nice. You mentioned in BioPharma that there may have been some stocking orders and somewhat one-time in the quarter. Can you help quantify what that is versus sort of the underlying rate that you're seeing?

[Eric Krasnoff:]

Well, the underlying rate is definitely solid double digit. When we say one-time, well, they're not so much one-time as, as we become a more key player in BioPharmaceuticals and particularly in chromatography, we get very large orders that don't get replenished on a quarterly or necessarily an annual basis. So we're going to see some lumpiness in consumables akin to what we often see in systems. And I think Ken can address the stocking issue.

[Kenneth Frank:]

The stocking issue, really, was just a one -- the customers in Asia who placed the annual order rather than placing on a quarterly basis, and that's obviously not going to be repeated for the rest of the year.

[Tracy Marshbanks:]

So they actually changed their ordering pattern on you, which bumped it up?

[Kenneth Frank:]

Yes.

[Tracy Marshbanks:]

And another question, just on the pricing and cost environment. You referred to this. Various costs are going up, obviously, oil and various commodities. Particularly in the businesses where you need to go after price to maintain margins, what's your view of your pricing power and ability to get -- to offset any cost increases you're seeing?

[Eric Krasnoff:]

I think as the economy is improving, and particularly as we're seeing this much higher level of demand for our products, the pricing opportunities solidify. It becomes -- we have more confidence now than we did two years ago, certainly, in our ability to get at least most of the inflationary impact back through pricing.

[Operator:]

Your next question comes from the line of Hamzah Mazari from Crédit Suisse.

[Hamzah Mazari:]

Just a couple of quick questions. You guys are doing a nice job on margins. Maybe if you could help us frame how much of the benefit is coming from mix, relative to what you're doing on the cost side. It seems like you're doing a better job cutting down overhead. There's some additional productivity that you're running through the system. Maybe if you can just touch on -- in whatever way you want to do that, whether you want to quantify it or talk anecdotally how much is coming from mix, how much is coming from cost? And then on the cost side, if you could give us some detail of what kind of initiatives you're doing there to drive margins.

[Lisa McDermott:]

I'll take that question. So Hamzah, when we look at our gross margin improvement year-over-year, I would say that a significant part of that improvement is definitely on manufacturing cost saves. And we've seen that particularly on the Industrial side of the business. And then to a lesser extent, it's mix. That's the way I would describe it. Because we had some very favorable mix [indiscernible] in high-margin products growing in the quarter, but we also had some of that mitigated with the systems increase in the quarter. So we're very much seeing a lot happening in our manufacturing plants now. In terms of the types of things that are going on in our manufacturing plants, we've spoken about in the past, the facility rationalization which, as I mentioned, we're continuing to look around the world and reduce our overheads through closing plants and consolidating. So that's one of the things we're doing. But then generally speaking, it's an institutionalized culture of process improvement and lean principle. So we're able to take existing manufacturing lines and consolidate them into pre-existing plants.

[Eric Krasnoff:]

Also, the consolidation of European management operations in Switzerland and the consumer consolidation for Asia in Singapore is giving us more leverage to improve. Anything else, Hamzah?

[Hamzah Mazari:]

Okay. Very helpful. Yes, and just on the new CEO search, Eric. If you could -- you talked about that search process being underway. But maybe if you could just give us some color on what type or background of individuals the board is looking at? Or any kind of color there of when can we expect the announcement? If you can't speak to that, what type of individual can your share owners expect that you guys are looking at?

[Eric Krasnoff:]

Yeah, well, as the announcement said, my intention is to retire by March 2012 when I will be 60 years old. And as far as the qualifications, I think we're looking for a world-class global leader who has excellent strategic and operational skill sets to continue to drive Pall forward.

[Hamzah Mazari:]

Okay. Great. Just one last quick one. On the Life Sciences side, could you just add a little more color on these sales channel changes that you guys flagged as being a benefit?

[Eric Krasnoff:]

Yes, we're -- we continue to -- each year, we're picking up a couple more distributors and going direct. And right now direct sales for BioPharmaceutical are about 90% of our sales. If you take -- so that's the trajectory. All right. Thanks, Hamzah.

[Operator:]

Your next question comes from the line of Kevin Maczka from BB&T Capital Markets.

[Kevin Maczka:]

Eric, I guess, first on MicroE, you talked about growth rates slowing, difficult comps, going to more flattish year-over-year in terms of growth rates in the second half. There's also been some talk previously about a retrenchment in that market, maybe something worse than just flattening due to flat panel display oversupply, things like that. What kind of visibility do you have in that market? And are you just not seeing maybe the significant retrenchment that you might have thought would be there by now?

[Eric Krasnoff:]

We have good visibility on the semiconductor side. On the consumer electronics side, which is about half of that MicroE market, our visibility is as good as the experts in the field, but no better. I think what we're seeing with flat panels is that the blood of LCD old technology is pretty much through, and the LED manufacturing is picking up steadily. So I think we'll see that by the end of the year. And that certainly is one of the catalysts for what we're looking at in 2012 as being a good pickup. The other side is capital spend on new capacity for semiconductors and new-generation chips where we're going to see those shipments in 2012.

[Kevin Maczka:]

Okay. And then switching over to the Muni Water side, up over 80% was surprisingly strong. I guess, can you say a little bit more about what drives that strength right now? And is there anything either Muni Water or otherwise that has been very strong in Q2 or even the first half that you don't see as sustainable outside of what we just talked about with MicroE?

[Eric Krasnoff:]

Yes, I think we're going to see Muni Water down in the second half, just because of the timing of orders, you're going to need a large system. So overall, the business is being certainly helped by the tightening of EPA regulations. And I think there's also more opportunity for capital spend in the U.S. on infrastructure, particularly things like water, for job creation.

[Operator:]

[Operator Instructions] And next question comes from the line of Jon Groberg from Macquarie.

[Jonathan Groberg:]

Just two questions. I guess, first of all, can you disclose what percent of BioPharma sales are Lab sales?

[Kenneth Frank:]

About $100 million is Lab sales.

[Jonathan Groberg:]

And I guess the other just maybe quick question, clarification question, what facility specifically in your Industrial business in Europe is closing? And, I guess, where is that being -- can you just maybe add a little bit more color around what you're closing and kind of where that's being transferred to just so we can understand a little bit better about that?

[Eric Krasnoff:]

Yes, it's our plant in Tipperary, Ireland. And the production capacity is being basically moved into existing plants in England.

[Jonathan Groberg:]

And is it a particular -- I don't know that specific facility. Is it a particular product, is it a broad membrane kind of manufacturing facility? What is that?

[Eric Krasnoff:]

It focuses on cartridges, on disposables for the Machinery and Equipment segment, primarily.

[Operator:]

Your next question comes from the line of Brian Drab from William Blair.

[Brian Drab:]

Quick question on gross margin. So if I look at the guidance, for the second half of the year, you're still forecasting -- well, you're forecasting 50% to 51% gross margin for the full year. That represents a downtick in the second half of the year. What are the main factors driving the decrease in the gross margin in the second half?

[Lisa McDermott:]

Well, principally, three things. We do expect to see a mixed headwind in the second half. We'll see systems become proportionately higher, while market like microelectronics, which is a higher-margin market for us, will be proportionately lower. That's one. The second is that we expect to incur some additional costs for that facility closure that we mentioned that we will reflect as part of our cost of sales, not as a restructuring and other charge. So that'll be a headwind to Industrial's gross margins. And then for both businesses, we do expect to adjust our inventory levels, so we will see some negative absorption.

[Brian Drab:]

Okay, got it. And then I just want to get a better handle on the mix issues that you saw in the quarter and then the mix between systems and consumables. So in this quarter, if we focus on Industrial for a second, the systems sales were outstanding in the Municipal Water side. It sounds like that's going to be a little weaker in the second half. Can you kind of reconcile that with the comment that you just made in terms of system sales being a little stronger in the second half? Which business are you talking about specifically where systems are going to off to offset that?

[Lisa McDermott:]

Well, certainly on the Energy side, as well as Pharmaceutical and Food and Beverage.

[Brian Drab:]

Okay. And then just one last question and I'll get off here, but you mentioned in the slides, unfavorable absorption in overhead in Life Sciences. Can you elaborate on that briefly?

[Lisa McDermott:]

Yes. During the second quarter, the manufacturing plants slowed production a bit because we have really accelerated production to make sure that we can meet demand because we saw a lot of demand coming our way. And there is some key manufacturing plants in Life Sciences, the media plants that are the genesis of a lot of other products throughout the company. So we were building some safety stops for SAP. We filled the demand, pent-up demand starting to unleash, and we wanted to make sure that we had the inventory levels to meet it. Now with our outlook for the back half, we're letting up a little bit and Life Sciences did do that in the second quarter.

[Operator:]

Your next question comes from the line of David Rose with Wedbush Securities.

[David Rose:]

Two quick questions. I was hoping you can clarify or quantify a little bit more in terms of your expectations on price in terms of how much price should affect the sales figures for Q3 and Q4?

[Lisa McDermott:]

Our forecast for the year is pricing overall of about 1%.

[David Rose:]

And are you prepared to increase prices if cost of raw materials increase?

[Eric Krasnoff:]

Yes, we've been looking at it very carefully over the last couple of weeks. And if we see a spike in inflation due to particularly to high oil, we are ready to become a little bit more aggressive with pricing.

[David Rose:]

And how long does it take to flow through the P&L? Is it a quarter basis? Or I guess it depends on product, too.

[Lisa McDermott:]

Well, in this particular case, relative to inflationary matters, it would flow through very quickly because it would come in the form, if not a negotiated price increase, something akin to what other companies -- like a fuel surcharge.

[Eric Krasnoff:]

Which we've employed in the past.

[David Rose:]

Great. And then last question. And I'm assuming that there hasn't been any impact and maybe you don't have any color yet. But have you heard anything from the Asahi plants in terms of [indiscernible]?

[Eric Krasnoff:]

No, we haven't heard anything from the Asahi plant. They have one plant that's in China as well as the plant in Japan. Our manufacturing plant in Japan was damaged, and we're doing an assessment now of how long it will take us to get back into full production. It doesn't -- from the initial reports, it doesn't sound like it was catastrophic damage, more of a -- a bit disruptive.

[Operator:]

Your next question comes from the line of Richard Eastman from Robert W. Baird.

[Richard Eastman:]

Just two questions. One, Eric or maybe Ken, could you just address the BioPharma growth? As we look at those numbers, I mean, is there an area or two that you can identify as share gains given that growth rate? Or were some of that growth driven by Pall's penetration into particular drugs that have had success? How do you position your growth rate relative to the industry, which is much higher?

[Kenneth Frank:]

I would say that it's not all just because of the industry volumes. We are winning new applications. I've talked about our broadening portfolio the last several years, and that gives us more presence in each of the major -- the new drugs coming through. So I think we are taking share and that we're taking share because of that increased capability we have. And also, the very sharp focus we have of being on the ground with our customers, helping them to establish their new processes.

[Richard Eastman:]

Is your share there most visible on the systems side? In other words, consumables kind of flowing with the systems gains that you had?

[Kenneth Frank:]

No, it's a mixture of both. I mean, the systems obviously is a future new builds. But once we have that relationship with a customer, we can establish ourselves in a number of processes around the system itself. So it's a combination of the two. But the more value we bring to our customers, obviously, the better chance we have of gaining share in that process.

[Richard Eastman:]

And then just secondly, if we would just rewind a couple of years and we look at where we were with the systems business and the profitability on systems, Pall has taken a lot of actions to improve that underlying profitability, some bill of goods, some manufacturing. But are you comfortable at this point that your systems -- are your systems gross margins around 30%? Or have you made some systemic progress there? It's hard to see in the mix, but...

[Eric Krasnoff:]

Yes, we’ve made significant process in the margins in the last two years. I mean that was the biggest contributor towards margin improvement. It was at least three years ago, let's say. But I think more importantly, when we look at the systems, we also add on the disposable filters that we're going to get. And I mentioned with the PROFi systems, for instance, well, they're probably around a 25% gross margin, just to throw out a number. We're going to get $500,000 million a year in consumables from those products.

[Richard Eastman:]

So including that, we're just comfortably up around more like 30% then at this point.

[Lisa McDermott:]

We're in a range of 27% to 30%, depending upon the mix of systems in a particular quarter.

[Operator:]

There are no further questions. Mr. Krasnoff, do you have any closing remarks?

[Eric Krasnoff:]

Yes, I would like to thank everyone for the attention today to the meeting. And we look forward to speaking with you again at our third quarter presentation, which is earnings release on June 8 and our teleconference 8

[Operator:]

This concludes today's conference call. You may now disconnect.