Mettler-Toledo International Inc (MTD) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2005 Mettler-Toledo International earnings conference call. My name is Carlo, and I will be your coordinator for today's presentation. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's conference, Ms. Mary T. Finnegan, treasurer and investor relations. Please proceed, ma'am.

Thanks, Carlo. Good afternoon, everyone. I am Mary Finnegan, treasurer, and I am also responsible for investor relations for Mettler-Toledo, and I want to welcome you to the call this afternoon.

I am joined by Robert Spoerry, our chairman and CEO, and Bill Donnelly, our chief financial officer.

I will start by covering some administrative matters, and I will then turn the call to Robert, who will provide you highlights on the quarter. Bill will then cover the financials in detail, and then Robert will update you on current market conditions and our strategic initiatives. Of course, we will have time for Q&A at the end. Now for the administrative matters.

First, this call is being webcast and is available for replay on our website. A copy of the press release we issued today is also available on our website. You should be aware that statements on this call, which are not historical facts, may be considered forward-looking statements for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act.

Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied. For further information concerning issues that could materially affect performance related to forward-looking statements, please refer to our filings with the SEC. We undertake no responsibility to release publicly any revisions to forward-looking statements.

One other item -- on today's call we may use non-GAAP natural measures. More detailed information with respect to use of and differences between the non-GAAP financial measures and the most directly comparable GAAP measure is provided in the press release. I will now turn the call over to Robert.

Thanks, Mary. I want to thank you for joining us today on this call. We are pleased with our first quarter results, and I will start by providing some summary comments on the quarter.

We achieved EPS of $0.47 in the quarter, an increase of 15% over prior year. We are pleased with this strong result. Our sales growth in the quarter was an increase of 6%, of which currency was a benefit of 3%, and our local currency growth was 3%. This was in line with our expectation. We are especially pleased to see strong performance in the Americas. Our gross margins in the quarter were excellent with 110 basis-point increase over the prior year. Finally, our cash flow generation fell below the prior year was in line with our expectation and reflected comparison issue with last year. We remain on track for our full-year cash flow targets.

Bill will now provide more details on the financials.

Okay, thanks, Robert, and hello, everybody. We had a solid first quarter with earnings per share of $0.47, which was a 15%, or $0.06-per-share increase versus the prior year. We are pleased to start off the year that way with these solid results. Now let me go into some more detail starting with sales.

Sales in the quarter were $337.2 million, an increase of 6% consisting of a 3% local currency growth and the 3% currency benefit. Adjusted for product lines being exited, our growth was 4% in the quarter.

As most of you know, we focused on local currency sales growth, which drives our operating performance rather than U.S. dollar sales growth. So for the remainder of the sales discussion, the numbers I'll be discussing, or the percentages I'll be discussing are on a constant currency basis. And then, of course, all comparisons are to Q1 of last year.

Let me start by breaking down sales by geographic destination. Growth in the Americas increased 7%. That was higher than we expected when we spoke last time. Laboratory and industrial products had strong sales growth, while retail was only slightly ahead of last year in the Americas. The stronger sales in the Americas helped to offset a slower-than-expected start in Europe where we had a 1% decline in local currency. Our expectations were for modest sales growth in the quarter. Contributing to the shortfall was a sales decline in retail, which had a strong first quarter in Q1 of last year. Laboratory was a little softer than we expected, and we had a slight growth in industrial in Europe.

Sales growth in Asia, rest of the world, increased 4%, pretty much on target with what we expected. On our conference call last quarter, we anticipated lower sales growth in the first part of the year because of tough comparisons. As a reminder, we had 18% sales growth in the region in Q1 of last year.

Turning from geography to business area, let me start with lab. Laboratory products were up 2% over the prior year, similar to what we saw in the fourth quarter. Adjusted for product lines we were exiting, sales growth was 3% in the quarter. Process analytics and analytical instruments had strong sales growth. Sales growth in drug discovery products was solid, while the balance business was down slightly.

Turning to the industrial products area, we had a strong quarter with sales growth of 6%, both our core industrial products as well as our product inspection business performed quite well in the quarter.

Finally, for retail, sales were down 2% in the quarter, which was below what we had expected, and this was driven by tougher conditions in Europe.

Now let me move to the rest of the P&L. Gross margins increased by 110 basis points in the first quarter. A few factors contributed to this improvement including increased sales volume, which leveraged our fixed-cost structure, favorable -- sorry -- unfavorable product mix and benefits of our cost rationalization efforts.

We are also seeing the benefit from more effective pricing via Project Spinnaker, which Robert will speak about in a few minutes. These positive factors were offset by somewhat higher steel prices.

R&D amounted to $20.8 million, or 6.2% of sales, on target with what we expected and modestly below last year in local currency terms. SG&A was $106 million and was up 10% in dollar terms. This was 3% accounted for the exchange rates, and the remaining 7% growth was in local currency. The factors that contributed to the growth in local currency were higher corporate governance costs including SOX-related costs and investments around Project Spinnaker, our growth initiative, as well as higher variable compensation. Together, these three items accounted for 4% of the increase, the remaining 3% are more general-type increases and spread across the board. The net sum of these items resulted in adjusted operating income of $35.7 million, which is a 9% increase over the prior year.

Now continuing down the rest of the P&L, amortization amounted to $2.8 million in the quarter, interest expense was $3.5 million, and our tax rate continued at 30%. This results in a net income of $20.8 million and an earnings per share of $0.47, again compared to $0.41 in the year-ago period.

Now on to cash flow -- net cash flow provided by operations was $6.7 million, slightly below our expectations. As I mentioned on our last conference call, we expected Q1 cash flow to be well below prior year. We have a couple of items impacting comparability in Q1. First, we paid out $15 million more in variable compensation this quarter than in Q1 of last year. Our variable comp for 2004 is paid out in the first quarter of 2005. In 2004, we exceeded our targets while in 2003 we, frankly, were below them.

The other item impacting comparability is the timing of supplier payments, which accounted for about $12 million of the difference. Our DSOs remained constant at 52 days, while our inventory turns improved from 4.4 to 4.6. I am happy with this improvement, but we are working to drive this number up above 5 in the coming years.

We remain confident in our full-year cash flow target of around $140 million. This represents operating cash flow less capital expenditures. Although we are starting down this year, we expect to recover in the upcoming quarters.

We purchased 528,000 shares of stock this quarter for a total value of $28.4 million. As I mentioned last time, our intention is to use our free cash flow in share repurchases. This, of course, could change with a sizable acquisition or other developments, but we are now working towards this target.

Our capital structure remains very strong. At the end of the quarter, we had net debt of $160 million versus the 12-month EBITDA of $209 million, which results in a net debt-to-EBITDA ration of 0.8 times. This gives us plenty of financial flexibility to continue our share repurchase program and have room for acquisitions.

In terms of guidance for 2005, on our last call we outlined guidance for sales growth in the 3% to 5% range -- that's local currency organic growth -- and earnings per share in the 2.65 to 2.75 range. We see no need to change those assumptions. In terms of Q2, current consensus is $0.71 per share, and I think that's a reasonable number.

Okay, that's it from my side, and now I'm going to turn it back to Robert.

Thanks, Bill. I want to start by adding to Bill's comment on sales performance and on our outlook for the remainder of the year. I will then cover some developments with respect to our strategic initiatives.

Looking at our geographic markets, as mentioned at the beginning of the call, I was really pleased to see the strong result in the Americas, plus a very solid performance with strong growth in almost all product lines. The growth in the Americas was above expectations for the quarter, and we do not expect it to continue at this level for the full year.

The strong performance in the Americas helped to offset the slower-than-expected start in Europe. We expect to have positive growth in Europe this year, so you should see improving performance in the coming quarters. In fact, order entry in our European industrial business was quite good this quarter, which supports our outlook for improved performance.

Asia, in total, came in where we expected. China had solid sales growth, but it was below the very high level recognized last year. As we mentioned on our last call, we expect growth in China this year to be in the low double-digit range rather than in the 20%-plus level that we saw last year.

Last year, we were positively impacted in Q1 by the estimate of SARS, particularly in the first quarter of the year that carried on.

We do see evidence of China's economy quoting, especially on certain bigger government type projects. Our other businesses continue to do very well in China. Of course, our strategy for China remains firm; that is, to capitalize on the growth areas in this region and to leverage our low-cost manufacturing capabilities.

Now, turning to market conditions in our businesses where we had a slightly different mix to our sales growth than we expected at the beginning of the quarter. I will start with the industrial business, which, as you have heard from Bill, was up strongly with 6% local currency sales growth. The good performance was seen across most product lines, and geographically was particularly strong in the Americas. I expect that we'll see some slowdown in the Americas in the coming quarters, and offsetting that, improving results in Europe and Asia.

Our laboratory business started slower than expected. Analytical instruments had a very strong quarter, and our drug discovery business had solid sales growth. Pipettes continued to generate solid revenue growth driven by the international expansion. Balances has a tough comparison, but we expect to see this to improve in the coming quarter with the launch of our new line of high-end analytical balances, and the upgrade of our basic cost-effective line.

As you heard, retail came in slightly below last year, which I point out was a strong quarter and as we were rolling out a major project in Germany at that time. We continue to have solid interest in our global food-retailing platform, UC, which I discussed on our last call. It would expect to have some growth in the low to mid-single-digit range for the remainder of the year.

Taken altogether, we remain comfortable with the guidance previously given to you for local currency sales growth of 3% to 5% for the remainder of the year.

I will now update on strategic development. Innovation, especially around products remains the core of our strategies. This quarter, we have many examples of important new product launches. We are now launching our high-end analytical balance XP. This is the last major piece to complete and upgrade of our balance line, which was started two years ago. XP is aimed at the regulated market, like the pharmaceutical industry, and provides significant values to our customers with the design features such as unique suspended weigh-in grid design, which provides greater speed and accuracy. It also has built-in warning system to prevent inaccurate use of the balance and easier man/machine interface. Because of its better accuracy, it reduces the required minimum weight, thereby creating substantial cost savings for our customers on expensive chemicals and substances. The XP is combined with our lab software, it gives us a clear solution advantage in this very important segment.

Two weeks ago, we participated at the Interpack Show in Germany. This is the largest show of its kind in the packaging industry, and it's held every three years. Our product-inspection business launched many new products at this show, which I want to highlight to you briefly. First, we introduced the X series of check weighers. Check weighers are about half of the product inspection business, and are a very profitable part of our offering, and we have a very strong leadership in that line. Most of our check weighers are sold into food and pharma manufacturing facilities, and they made some very important innovation in the X series that we think are very well received from customers.

First, the customer wants to have simplification of their inspection processes. We have done a few things to facilitate this need, including incorporating a very intuitive operating terminal with our color touch screen, which is easy to operate and requires minimal training. The terminal is designed to control multiple inspection devices, therefore reducing the number of operator interfaces of the plant flow. You can easily integrate the metal detector or other inspection devices and control them from the control of the check weighing. Even the mechanical design of the check weigh has been improved to allow for easier physical integration of multiple inspection devices.

The X series also has the most modern software platform in the industry with an open-system architecture, easy connectivity, and standard interfaces to typical plant communication protocols like Fieldbus, PROFIBUS, and Ethernet.

Finally, the X series has the most sanitary design in the industry with a stainless steel open frame design. It is the only check weigher to have IP69 weighting between that it holds the highest possible rating for water and [unintelligible]. This allows for easy cleaning with a high-pressure water hose down. The X series is the most hygienic check weigher on the market, which is extremely important to our food customers where sanitation issues are critical.

We also introduced at Interpack our new x-ray system, which we call "T-10." X-ray is a small but fast-growing segment within the product inspection division. T-10 represents our effort to offer the market a stand-up and easy-to-operate solution as compared to customized, highly complex systems, which dominated the market so far. T-10 will be priced approximately one-third below the previous x-ray product and will focus on contamination detection and mass control. We have made a significant effort to make this product better-suited for the large food market by systematically adding a color touch screen, increasing the durability of its design, simplifying its use, and serviceability, and have even made it better-suited for the wash-down environment to a better, easy-clean design.

The last item we will be introducing is a new family of metal detectors under the Profile name. As a reminder, metal detector is nearly half of our product inspection sales, and we have a very strong and profitable position under the Safeline brand. Profile pulls many of the same themes as the X series and the T-10. It's easier to operate, has color touch screen, allows for better connectivity with the plant information system, and is more easily integrated with other equipment from the plant floor. Profile is the first metal detector in the market because the single pass setup and automatically clustering the product. These two features alone can reduce the setup time by as much as 80%. The Profile also includes self-monitoring for full conditions. This is a great feature because of the customers. It is also about up-time. Self-monitoring will eliminate most up and down time. If you further reinforce Safeline's reputation for having the highest up times of any metal detectors in this market.

In addition to technology innovation, we have been talking to you for several quarters regarding Project Spinnaker, which is aimed at accelerating our organic sales growth rate. As you know, sales growth in the most important driver for earnings growth. Through Spinnaker, we believe we have a significant opportunity to expand our market share to accelerate the replacement of our installed base, and to increase the productivity of our sales force for more effective sales and marketing. We also believe that through Spinnaker, we can improve the productivity of our sales force, our service force, and through better use of automation tools.

Let me take a minute to update you on current focus areas for Project Spinnaker. First of all, on pricing. As Bill already mentioned, pricing has played an important role in our margin expansion in this quarter. We have increased service pricing across the board, and product pricing in most lines in most countries. We are not doing this process blindly. In fact, in selected few segments, we have been more drastic in pricing in order to be price competitive. But, generally speaking, we have chosen to raise our prices.

Secondary of Spinnaker's lead generation, where we have the ambitious target for increasing the number of leads significantly, we continue to invest in various forms of lead generation and remain convinced that this method will succeed. Successful lead generation program will be the most important part in improving sales productivity and this metric that we will monitor closely. At the heart of lead generation is our segment marketing initiatives and all our business units have now an action plan for segment marketing in course of the year.

In parallel, we have expanded our telemarketing resources to follow-up on lead qualification and direct marketing. Initial results are very promising. We believe that as the program continues to gain momentum and the techniques become more refined, we will be able to raise the productivity of our sales efforts.

Another area we will be addressing with Spinnaker is sales through indirect channels. We refer to this initiative as our "volume strategy." We have always been very successful in direct sales of high-value solution as evidenced by our strong market shares. The volume market is also a significant size but we need a separate business model for this market, and have developed a task force for the implementation of that. They are currently evaluating supply chain, channel strategy, product mix, marketing programs. We are confident that this will open up new market opportunities for us in the future.

Finally, with respect to field automation, we have formed a competency center to support the automation of the field organization. New automation tools, like CRM, have already been rolled out to the field organization in past years. We have now selected a tool for the automation of our service business, and that with a certain software modification, we will roll it out globally.

As you can see, our strategic initiatives remain right on target. Before I open for questions, I want to summarize what we discussed today.

We are pleased to have achieved our financial targets for the quarter. Sales growth was on track, and we see strong improvements in gross margin, which led to a 15% earnings growth. We remain optimistic for the remainder of this year.

That's it from our side, and now I'd like to ask the Operator to open the line for questions.

[OPERATOR INSTRUCTIONS] Tycho Peterson, J.P. Morgan.

Hi, thank you for taking my call and congratulations on the quarter. Wondering if you could provide a little bit more color on some of the softness you saw in Europe? I think, in particular, you talked about softness in the lab market. Is this pharma or academic or both?

The softness in Europe, indeed, was partly in lab, but that's also partly in retail. Maybe first commenting on the retail piece -- in retail, we actually had a very strong first quarter last year, and that strong quarter was based on the major rollout we had with a big customer in Germany. Now, the last part, you know, is currently more the traditional pharmaceutical biopharma industry, and not really the academic sector, where we were hurt. As you know, the academic sector is, anyway, a small part in our global mix.

We have had European customers reach -- did actually, really, not invest much in the first quarter and they say that they wait 'til they see the year develop before they're going to release and, in that sense, it was a little difficult. But also last year we had a very successful start with the new laboratory products in Europe. We rolled them out first in Europe before we rolled them out later in the other parts of the world. So it was partly also comparison issue.

I would expect that in the lab in Europe things will improve because we're going to have very fascinating new product launches, as I just explained before. The XP analytical line is just one of many new products we're launching. We have actually new PH meters, we have new titration equipment, and that all is just happening, you know, this week or partly already concluded. So we should see those benefits coming in the coming quarters.

Okay, and then with regards to China, you talked about that potentially recovering to double digits for this year. Do you have early signs that the market is turning around there? How do you gauge that?

First of all, the first quarter we saw high single, low double-digit growth in China, and that's a fine achievement if I compare that to the first quarter last year where we had the soft carryover, as I mentioned before. Our expectation is that this government call-down programs, while they are effective right now, will hopefully be a little more relaxed in the second half of the year, and through that we should see good growth coming back in the second half of the year in China.

We also continue to make aggressive investment in China -- maybe not so much just in our infrastructure, but really kind of strengthening our sales networks throughout the country. China is a big country, and we don't have a strong presence in each and every region of that country. So we make that investment and, of course, that also should help us continue the growth back there.

Paul Knight with Thomas Weisel Partners.

Hi, this is Peter Olson in for Paul Knight. I wonder if you could comment about the slow start you saw in the lab instrument business, and where was that coming from -- pharma or biotech?

The slow start we had came really mainly from Europe. The U.S. business actually was good, solid in the lab. If I look at it more by product line, the analytical instrument did well, so did Altacam [ph]. It was more on the balance side. The balances were slightly down globally versus last year. I would say that, really, the typical effect we see when we announce new product lines. When we announce new product lines, very often customers would know that and wait 'til they see the new product before they buy. But I also explained just before, you know, the impact of maybe some investment stops in the European biopharma companies.

Could you repeat the projected growth rates you have for the three divisions?

Bill, do you want to take that question?

Sure. In terms of the laboratory and the industrial businesses -- actually, all three businesses this year -- we entered the year expecting that we'd be in the mid-single-digit growth rate for all three. I think we're off to a slower start in retail and a slightly better start in industrial, but they should all be kind of in that range for the full year.

Okay, and what's the fastest-growing business area you have? Like, say, is it food preparation or something in China?

I think process analytics has been going really well for us. That's where we're doing chemical analysis on water purity and things like that. Our Ingold brand, and our Thornton brand have been growing quite nicely. I would say that's probably the single best area.

What geography?

That we sell around the globe but, of course, we have bigger positions in the United States and Europe.

Thank you. One last question -- how much of your manufacturing do you have in China and India?

Not to much in India. India mostly just serves the Indian market, which isn't that material for us, but if you were to look at products of our product sales, we are now, let's say, mid-teens kind of level in terms of product sales on products manufactured in China.

I was just going to add that now China is about $100 million kind of a market for us, too, and I guess you can see that in our disclosure numbers.

Derik De Bruin with UBS.

Hi, thank you, and nice quarter. So a couple of questions -- given that there have been some signs of pharma cooling, I guess, and one of the issues with metal products is the fact that you make them so well they last so long, it often takes a long time for people to replace products. Are you concerned at all that there might be some delay and uptake of some new products if things are a little bit slow?

Derik, of course, this is a question, which we fight with almost every day. You are absolutely right. Our product lasts forever, and the trick to trigger to replacing these is innovation. And, of course, this innovation, which we are providing to our customers, we need to provide a return on the investment. Maybe I should use now the XP balance product, which we just launched and try to articulate to you what kind of value propositions there are in that product.

Whenever somebody does a measurement on the balance, they need actually to appear to U.S. pharmacopoeia in the regulated application. This will tell you how you determine the minimum weight you can use the balance for. We have, today, with the XP, significantly more accurate balances, which is a big deal, because we said you can reduce the minimum weight to what we had for people had used so far -- significantly below what competition can do.

Chemical substances, which they weigh, can be sometimes very costly -- can be 10, even 40,000 per gram. You can imagine that can be translated to big cost savings. Then another big feature the product has, it has kind of an automatic control on the setup and in case something is not set up properly, actually, you cannot work with the product. So it adds tremendously to the safety. People often do a job on a balance, and actually the balance is not set up properly, and so they actually had the wrong results. We have seen the new product incorporated as in the technology, which can detect whether it is properly set up. So that's another big, big feature we have in there.

The third one, the balance, is actually much faster than previous technology. We're awfully excited there. The new tool prepares compounds for screening properties also, highly repetitive work, very often labor-intensive. Of course, if you can do the job significantly better, you can save a lot of labor cost.

So these are the challenges. We need to bring this value proposition constantly to our customers, and that way I think we have a very fair chance to rake [ph] up the replacements.

Talking about your indirect in Project Spinnaker, your indirect distribution, looking at that now -- I know some of your Ohouse [ph] products are distributed through other companies, and I think some of your RAININ products, as well. Are you looking at putting some of the other higher-end Mettler-Toledo products into, say, the Fisher, VWRs [ph] of the world?

Actually, Fisher and VWR are very important customers for the low-end Mettler-Toledo balances already, and they are long-lasting partners, and we have been both very successful working together.

However, this may be something, which we don't exploit in every part of the world to its full extent. And when I look at our offering, you know, we certainly have typically designed a product but also increasingly, due to the Chinese low-cost capabilities, we have strong low-end offering. For this low-end offering, we need other forms of marketing, distribution, and service. Of course, to some extent, Ohouse is playing in that -- our second brand for balances, and we can certainly to another business level gain many more market share in these low-end markets. This is, by the way, not only true for laboratory products, I will say this goes across also some of the industrial and the retail products.

And then just one final question -- what's left on -- just refresh me on your share buyback authorization -- what's left on it and where do you see the share count by year-end? I realize, of course, that's dependent upon what you see in terms of potential acquisitions but just some general ideas.

Okay, so in terms of how much availability, it was a $200 million program that was approved at the end of last year. We've spent about $28 million so far, and our current free cash flow estimates are in the range of $140 million or so, and we've disclosed, hey, we'd like to repurchase about that number of shares. And so we've done about $28 million so far. So you could imagine the share count would go down proportionately.

In terms of an estimated share count at the end of the year, it should be in the range of around 43 million shares or so.

Darryl Pardi, Merrill Lynch.

Good evening. What was the net price increase in the quarter? What's your outlook for the year, Bill?

I maybe would describe it -- just to say it a little differently is net realized price increases. We raised prices this year across most of our products in the range of 50 basis points up to 2%, and maybe even a few more than that. But, of course, we don't expect to realize all that. If I look at the current quarter in terms of the 110 basis-point improvement, I would say that there are two positive factors that are driving that number. One would be pricing, and the other would be the volume impact. And those two together are probably about 200 basis points. And then you've got a couple of things going the other way, and that is the mix was a little bit negative with us selling more industrial products, you know, the industrial products have a lower gross profit margin than the lab products. And then, secondly, we did take it on the chin a little bit with foreign exchange. You know, we're not exporter from Europe into the United States, and so that hurt on the cost-of-sales line, and those two together kind of net off against the positive benefits of volume and price.

Speaking of FX -- devaluation of the REM-NB [ph], would that be a wash for Mettler, because you manufacture approximately the same portion of revenues that you have and generate in China or would that affect profitability?

I looked at that at the beginning of the year, and so I can't imagine that it's change materially, and the answer would be on an operating profit point of view, it's net neutral, okay? And it's for the reasons you just described. I do have a bit of an intercompany exposure that I have not hedged, and, as you know, Darryl, the cost of trying to hedge the REM-NB for the last 12 months is out of this world. So I think I have an exposure there of -- Mary's giving me hand signals -- 5 million to 7 million, and you can kind of do the math on that. So that would be more of a foreign exchange kind of other income charge if it happened today.

We actually started in the fourth quarter managing -- the exposure was up in the $20 million range, and we managed it down in the last couple of quarters.

I don't know if I'd doing my math wrong, I come out to -- when I take the cash that you used to purchase shares, divide by the 528,000 shares, I come up with an average purchase price of about 53.70, which is above the range where the stocks traded.

Okay, why don't you give us a second. We actually get a report on that. Merrill Lynch is our purchaser, Darryl, so I can't believe that would have happened. So let me check that one, and we'll let you know in a second.

Robert, could you discuss what the adoption has been for LabX for the balances. Have you rolled out some of the new instruments, what the adoption has been in the software in coordination with those sales?

LabX reception in the market is excellent. I guess you recall from previous statements on the titration equipment, actually, probably 35% of the products are, to date, sold with LabX. What concerns the balance piece, we are not yet in significant volume, however, we have very significant interest from the customers. The decision-making process here is just a little longer because it is now also in IT. But the prospects are very promising, and I am very convinced this is going to become a success. Again, particularly when I combine that with the new balances -- these new balances, as you recall, they have much improve man-machining to face, the color touch screen and through that, of course, we can much better integrate that product into centralized LabX workstation. So, Darryl, if it's only for the optionality that people know that we have it, and they can buy it at the late point, it's already a great sales tool today.

Hey, Darryl, the answer to your other question is that there is a -- at the end of last year there was $1.3 million open position, so we paid -- we had purchased the stock on December -- whatever the last trading day was -- but we didn't pay the cash out until the first bank day of January, and so there's 1.3 million of cash out the door this year that relates to purchases that we owned at the end of last year -- in effect, the flow. And if you adjust for that, it's $51.

Scott Wilkin with UBS.

Bill or Robert, just wanted to get your comments, if I could, just on maybe the pipeline. Robert, I think you mentioned risk intake activity in April. You historically have been very conservative guys, and you look around at some of the comps, you know, pretty much across the board, folks have experienced a slowdown in the first quarter, and you guys seem relatively confident about your guidance and about the rest of the year. I'm guessing it has something to do with the order flow that you're seeing. Could you just elaborate a little bit, qualitatively there, on what's giving you the confidence here by maintaining guidance for the year?

Maybe the way we look at a year is, of course, based on order intake, but that's not the only guiding principle, I think. It starts earlier and we, of course, know the inquiry levels -- the inquiries concerning the quote level, and, of course, as long as the probability of turning quotes into orders remains the same. That's a good forecasting way.

I, of course, on order intake, can tell you that we have the [unintelligible] of a couple of weeks. You know we have typically order from six, seven, eight weeks, so it's not really deep into the year, but from all I see in terms of order intake we carried from last year into this year, order intake, we also filled up in Q1, we remain really confident for the rest of the year.

Yes, you are right, we are typically a little conservative as we start the year, knowing that usually you'll not see every problem around the corner, and certainly now the case, you know, we did hope a little better improvement to see in Europe, and that didn't really come through and, for that reason, our conservative guideline, as you call it, probably was the right thing to do.

Nevertheless, I would expect that Europe gets better. We have very strong orders, particularly in the industrial business in Europe, and that certainly will help in the near future.

That's helpful. Just turning to operating expense item SG&A, I think, Bill, you mentioned that you were 7% local growth and then net of SOX and Spinnaker startup costs, it was more like 4%. So can I take those costs as being one-time or front-half loaded, and that you would not be burdened with some of that expense in the second half?

In terms of the SOX piece, it's for sure, Scott, that we will not -- we are incurring more SOX cost pro rata at the beginning of the year, will incur, probably, actually, a little bit less at the end of the year.

In terms of Spinnaker, I think we are making a conscious effort and are redeploying some resources from other areas to focus on these growth things. So I think that's a little bit dependent on how we see the returns on those investments, but I think Robert and I and the rest of the organization are committed to investing in these marketing and sales efforts to try to accelerate the growth level.

With regard to variable comp, which was the third element, and if you kind of net those out, it actually brings you down to about 3% growth in the other areas. We have a variable comp scheme, as you know. We felt a good quarter and if we kind of pro-rated that out for the year, it was higher than we had projected in the comparable quarter of Q1 of last year. Actually, if I look at the later quarters in Q1, we finished the year quite strong, so we were absorbing relatively higher variable comp in the later quarters of last year. So there should be some recovery there if we stayed on the current track but, again, if we start exceeding target, that might go up slightly.

Oh, yeah, that will be a good problem.

That would be a good problem.

And just on the balance sheet, I didn't catch the -- my calculation of DSOs shows that it was up versus year-end and also first quarter last year. I didn't get the comparison number that you provided, Bill, because I know you adjust it, do it a little differently.

We literally do it down to the day, so we know what our sales numbers are, and it's the exact same -- 52 days for both periods. Actually, one of the guys just slipped me a report, it's even down to the decimal point -- 52.4 for both periods.

The movement in absolute dollars is more of a currency?

It's more currency-driven, correct, and it might be to the weighting within the quarter. It could be that March was relatively -- actually, if I think about the three months in the quarter, March was relatively the stronger month.

Vivek Khanna with Argus Partners.

Hi, good evening. I just had a question on the -- can you talk about the organic growth in the pharma/biopharma end market?

Okay, as you know, almost half of our laboratory sales are oriented towards pharma, and so if we look at our lab numbers overall, we had 2% growth, and if you pull out the exited product line, that number goes up to 3. If you were to measure that by, in more details, by geography, in the U.S. we did relatively better, and in Europe we did relatively worse, and within our Chinese business, that wasn't the strongest part of our -- or I should say, Asia business, as you know, China is a large part of it, that wasn't the relatively stronger number. I think that answers it for you.

In terms of your guidance, Bill, of 3% to 5% revenue growth, what has to go right to get to the upper end of that and just any thoughts on what may allow you to get to the upper end of that guidance?

I guess if I go back to how we guided you at the beginning of the year, we're hoping that Europe improves, I think. Just, if you think about it in this current quarter, if we have almost half of our businesses in Europe, if that grows 2% versus -- that grows minus 1, that alone is 150 basis points. So Europe is clearly one of the more important pieces to that puzzle. And then, of course, actually, Asia/Rest of World, we think that you'll see a better number coming out the third and fourth quarter than you saw in the first quarter or you're probably going to see in the second quarter.

And so looking today, as Robert was saying, you're seeing European orders actually improve from what you experienced in the first quarter?

We had --

In the industrial business.

Sorry.

Right.

But not all of Europe, is that making that subtle difference -- differentiation?

Actually, I think, in general, the order growth across product lines was better in Europe than the sales growth but, in particular, the industrial order growth was quite good.

In terms of countries, you know, probably France is still a tough market. The other markets seem to be in okay shape.

[OPERATOR INSTRUCTIONS] Paul Knight.

What was the guidance for the quarter -- the EPS?

For Q2?

Yes.

$0.71. Are there any other questions, Operator?

No, sir, not at this time.

Okay, thank you very much, everybody. Have a good evening.

Thanks, guys.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect.