Revvity Inc (RVTY) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 PerkinElmer earnings conference call. I will be your coordinator for today's conference. At this time, all participants will be in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) At this time, I would like to turn the call over to your host for today's conference, Mr. Dave Francisco. Please proceed, sir.

Thank you. Good afternoon, and welcome to the PerkinElmer second quarter 2009 earnings conference call. I'm Dave Francisco, Vice President of Investor Relations and Treasurer of PerkinElmer. With me on the call are Rob Friel, Chairman and Chief Executive Officer and Andy Wilson, Senior Vice President and Chief Financial Officer. If you have not received a copy of our earnings press release you may get one from the investor section of our website at www.PerkinElmer.com or from our toll free investor hotline at 1-877-PKI-NYSE. Please note this call is being webcast live and will be archived on our website until August 13, 2009.

Before we begin, we need to remind everyone of the Safe Harbor statements that we've outlined in our earnings press release issued earlier this afternoon and also those in our SEC filings. Any forward-looking statements made today represent our views only as of today. We disclaim any obligation to update forward-looking statements in the future even if our estimates change. So, you should not rely on any of today's forward-looking statements as representing our views as of any date after today.

During the call, we will be referring to certain non-GAAP financial measures, a reconciliation of the non-GAAP financial measures we plan to use during this call, and the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent that we use non-GAAP financial measures during this call that are not reconciled to GAAP in that attachment we will provide reconciliations promptly. I am now pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Rob Friel.

Thank you, Dave, good afternoon. I appreciate you joining us this afternoon for our second-quarter 2009 earnings call. We were quite pleased with our financial performance in the second quarter and are encouraged by our ability to continue to execute successfully in this difficult economic environment. While our revenue declined in the quarter, we were able to expand adjusted operating margins, generate very good cash flow, and exceed our EPS guidance. In addition, we continue to introduce new products and expand into adjacent markets in both our product and service offerings.

During the second quarter, we launched our new backs on beads technology for targeted molecular carrier typing used in prenatal testing, announced the acquisition of Analytica of Bradford which further enhances our [mass spectromecies] and expanded our research reagents offerings with new [alphaliza] panels and expanded GPRC cell lines. We also increased our commitment to the India market with the opening of a new service training and service center in Mumbai. Across our entire portfolio I believe we are striking the appropriate balance between implementing cost reduction actions while maintaining a focus on innovative solutions for our customers.

While Andy will get into more detail about our financial results in the quarter, I will walk through each of our major end markets. Our human health business represented 43% of our revenue in the quarter, and organic revenue contracted at a low, single-digit rate. This business is primarily focused on developing screening and diagnostic tools and applications to fight disease earlier, provide medical insights more accurately and create critical new therapies more quickly. Within human health, we serve two end markets -- diagnostics and research, which represented approximately 26% and 17% of our revenue respectively in the second quarter. Our organic revenue from our diagnostics business declined at a low single-digit rate in Q2 with screening growing at a mid-single-digit rate and medical imaging down over 20%. The solid growth performance in our genetics screening business was driven by continued expansion of neo-natal screening, particularly in Asia as well as strong growth in prenatal screening. Our core blood business grew at a mid-single digit rate in the quarter. Despite some pressure of many state budgets, we anticipate that screening will continue to perform well in the second half of 2009.

In our digital imaging business, high-end system orders continue to be deferred due to lack of financing and ongoing hospital constrain on capital expenditures. We continue to broaden our offerings with new OEM partnerships in non-medical applications to help offset the soft not in our traditional medical application end markets. However, due to the long lead time required for design into these systems we do not expect to see much benefit from these efforts until 2010.

Looking ahead to the balance of 2009, we now expect this market to remain heavily constrained and believe our diagnostic imaging business will be down more in the second half of this year than it was in the first half. Our research business provides a broad suite of products, reagents and software designed to improve the drug discovery process. In the second quarter, our research business, organic revenue declined at a mid-single digit rate. We have seen the research market in pharma spending stabilize, however, during the quarter we did experience stimulus-related order delays in the academic sector as many of our academic customers are redirecting their budgets in hopes of obtaining grant moneys for larger instrument purchases. For the remainder of the year, we believe that the research market will provide solid mid-single digit growth as funding initiatives from various government stimulus packages are finalized and directed towards specific areas of research. In addition, we believe cellular imaging and cell-based reagents will be areas of increased investment by both our academic and biopharma customers.

Our environmental health business represented 57% of our revenue in the second quarter, and organic revenue contracted at a low, double-digit rate. This business provides a number of applications and technologies that improve and protect the surroundings and environment in which we live and addresses the laboratory services, environmental, safety and security, and industrial markets. Our lab services business represented approximately 21% of our revenue and organic revenue grew at a low single-digit rate in the quarter. This business continues to be driven by very strong growth in our multi-vendor, one-source offering, where we once again added a number of new programs in the quarter. This growth was partially offset by maintenance deferrals and lower pull-through service related to instrument sales such as qualification and training. We believe the laboratory service business should continue to perform well for the remainder of 2009 as large customers move the to suppliers that support all aspects of their business and the growing need for instrument qualification due to stricter regulatory requirements.

The environmental market represented approximately 18% of our revenue in the quarter, and organic revenue contracted approximately 20%. Private environmental testing labs continue to be constrained by tight capital budgets. This constraint appears to be most acute with our smaller customers who continue to have difficulty accessing credit, causing them to extend the life of their existing equipment. An area of offsetting growth, however, is the production analysis of renewable energy, development in both our UV vis technologies and LED products. As we look to the second half, we are assuming our customers will continue their cautionary bias. However, longer term we believe regulatory requirements for lower detection limits on new and existing contaminants as well as identification of new contaminants will drive demand for our product offerings.

Safety and security represented 10% of our revenue in the quarter, and organic revenue declined at a high single-digit rate during the second quarter. Consumer safety laboratories are beginning to ramp up their testing capabilities in preparation for new consumer safety regulations requiring lower detection limits, which are expected to go into effect in August. While food safety laboratories in developed regions are tightening their budgets for traditional technologies and being very selective in their capital investments, increased regulations in developing regions are showing strong growth, particularly in China. Our components offerings primarily used in fire and intrusion alarms continue to be negatively impacted due to the declines in commercial and residential construction.

Moving to the second half we anticipate the construction-related spending will continue to be impacted by recessionary pressures, but food and consumer safety will provide some offsetting demand in key technologies. The industrial market represented approximately 8% of our revenue in the quarter, and organic revenue declined over 20%. These markets which principally include polymers, chemical, petrochemical, and semiconductor end markets continue to be severely impacted by weak industrial spending. We continue to see a sharp decline in traditional chemical and semiconductor markets as CapEx spending remains limited. We expect that due to economic conditions and cautious consumer spending, industrial purchasing will continue to be down significantly through the remainder of 2009.

Before I turn the call over to Andy, I would like to discuss our adjusted earnings per share guidance for the full year. During the first half this year, the majority of our businesses performed as expected or, in some cases, better than forecasted at the beginning of the year. However, our medical imaging business is experiencing greater contraction than expected. And as I mentioned previously, we now believe that it will decline more in the back half of the year than the first. In addition due to a shift in the geographic distribution of our income, we currently believe that our tax rate will be up significantly over 2008 and our 2009 plan. Consequently, we do not think it is appropriate to maintain the higher end of our original guidance for adjusted EPS, and are narrowing our full-year guidance to $1.18 to $1.24 from $1.18 to $1.32. I will now turn the call over to Andy.

Thanks, Rob, and good afternoon everyone. I will now provide some additional color on our second-quarter financial performance as well as provide guidance for both the third quarter and the full year. After my prepared remarks we'll then open up the call for questions. Before moving into the financial details, I'd like to clarify that whenever I talk about a particular measure being up or down, I'm referring to an increase or decrease in that measure during the second quarter of 2009 compared to the second quarter of 2008. To the extent I use any non-GAAP measures, those measures have been reconciled to the comparable GAAP measure in the financial tables of the press release or have been posted on our web site.

As Rob mentioned earlier, we executed well in the second quarter, generating a solid earnings and cash flow performance despite the top line challenges we experienced due to a very difficult global economy. Revenue for the quarter was down 14%, the unfavorable impact of foreign exchange was 6%. The favorable impact of acquisitions was 1%. Therefore, our organic revenue was down 9% versus the prior year. The remaining revenue and (inaudible) in my prepared remarks will be presented excluding the unfavorable impact of foreign exchange and the favorable impact of acquisitions.

By segment, organic revenue declined by 4% and 13% in human health and environmental health respectively. On a regional basis, organic revenue in the Americas declined at the high single-digit rate. Europe declined low double digits, and Asia declined mid-single digits. Within Asia we saw robust growth in China offset by continued pressure in a number of other emerging territories where many of our markets remain challenging. Adjusted gross margins expanded 60 basis points in the second quarter driven by favorable impact of mix as we experienced relatively good performance from our higher margin product offerings. In addition, we have managed our direct labor costs through restructuring actions taken in the first quarter and driven strong productivity gains through aggressive supply chain actions.

Adjusted research and development expenses were $25.1 million or approximately 6% of sales in the quarter as we continued to fund the development of innovative new products, applications, and solutions. Adjusted selling general and administrative expenses decreased by $18.1 million versus the prior year. SG&A expenses were up as a percentage of sales by approximately 30 basis points as compared to the second quarter of 2008. Of which foreign exchange contributed 20 basis points. Successful cost initiatives and lower compensation costs in the quarter were offset by higher pension expense and the funding of strategic investments in our higher growth geographies.

GAAP operating profit was $37.9 million in the second quarter of 2009 versus $44.7 million in the second quarter of 2008. On a non-GAAP basis, adjusted operating profit was $52.2 million versus $59.6 million in the second quarter of 2008, which as a percentage of sales represents an increase of 20 basis points year-over-year to 12%. Interest expense net of interest income for the second quarter was $4.1 million as compared to $4.9 million in the second quarter of 2008. This decrease was primarily due to lower interest rates on outstanding debt balances. In the quarter we had an effective tax rate of 32% on a reported basis, which was approximately 650 basis points higher than the prior year. This increase is due to a year-over-year shift in the geographic mix of income as our businesses are experiencing the most significant economic pressure generally have manufacturing facilities and advantageous tax jurisdictions. Although we expect our tax rate to normalize as the economy recovers, the effective tax rate for the second quarter of 2009 resulted in the unfavorable impact in the quarter of approximately $0.02 per share over the prior year.

GAAP EPS from continuing operations in the second quarter of 2009 was $0.20 compared to $0.25 in the second quarter of 2008. Adjusted EPS from continuing operations was $0.28 in the second quarter of 2009, down 15% from the prior year. This is above our guidance range for the second quarter of $0.25 to $0.27 and ahead of first call consensus estimates of $0.27. Regarding share count, we had 116.3 million average diluted outstanding shares in the quarter, which was essentially flat sequentially.

Turning to the balance sheet we continue to maintain a very strong financial position. We finished the second quarter with approximately $373 million of net debt, which we define as short and long-term debt minus cash. This reflects a sequential reduction in net debt of $9 million in addition to the $30 million of reduced outstanding borrowings related to the termination of our accounts receivable securitization program. We made the decision to terminate this program in the second quarter as we believe we have sufficient liquidity available from existing sources which are a significantly lower borrowing cost. At the end of the quarter we had approximately $151 million of cash and approximately $260 million of undrawn availability under our revolving line of credit with no mandatory maturities due until 2012.

Looking at the cash flow statement in the second quarter of 2009, operating cash flow from continuing operations was $39.4 million as compared to $71.9 million in the second quarter of 2008. As we previously mentioned, our second-quarter 2009 performance was impacted by the termination of our accounts receivable securitization program, which reduced operating cash flow by $30 million. As discussed on the first-quarter call, while this is essentially a financing transaction, accounting standards require us to treat the net changes in the program as operating cash flows. Therefore, our adjusted operating cash flow from continuing operations was $69.4 million in second quarter of 2009, representing a modest decline of 3% over the same period last year. Working capital returns were essentially flat year-over-year, our continued focus on working capital has minimized the impact of external pressures on commercial terms due to current economic conditions.

In summary, we're pleased with our financial performance for the quarter, particularly in light of a very difficult global economy. Let me provide further detail on our guidance. Despite exceeding expectations for the first half of 2009, we feel it's prudent to moderate our full-year guidance range due to a number of factors. As Rob mentioned, while we continue to see stabilization and solid growth across much of the portfolio including our screening, research, and service markets, we now believe the economic challenges we face in medical imaging and industrial end markets will be more protracted than originally anticipated. Ongoing capital (inaudible) help ending constraints in these markets continues to negatively impact demand. For the second half of 2009, we did not see a significant change in these factors and, therefore, we expect organic revenue to decline in the high single digits in the third quarter and the mid-to high single digits in the fourth quarter.

As a result we now expect our full-year organic revenue performance to be at the low end of our original 2009 guidance range or down mid-single digits. Mitigating much of the top line decline as expected favorable sales mix, an improved foreign currency environment and a reduction in labor costs due to additional headcount reductions already completed during the third quarter. Additionally we expect our distribution of income to be generally consistent with the second quarter through the remainder of the year and, therefore, we are estimating our effective tax rate to be approximately 30% in the second half of 2009, representing an additional headwind to our balance of the year earnings guidance. Bringing all these factors together we are narrowing our full-year adjusted earnings per share guidance range for 2009 from $1.18 to $1.32 to a new range of $1.18 to $1.24. Adjusted earnings per share for the third quarter is expected to be in the range of $0.25 to $0.27.

In conclusion, we're pleased with our financial performance in the first half of 2009. As Rob mentioned, our employees have executed extremely well in a very challenging environment. As an organization we've maintained a strong focus on the priorities that we set at the beginning of the year and have performed well against those objectives. As we mentioned, we remain focused on the long term, we have maintained that focus throughout this economic downturn. We fully expect that based on this commitment we will emerge a stronger company as the economy recovers. I will now turn the call back over to Dave.

We'd like to open the call for your questions.

(Operator Instructions) And our first question comes from the line of Ross Muken with Deutsche Bank. Please proceed.

Good afternoon.

Good afternoon, Ross.

So, as we look at sort of the top line, I want to dig into a few things. So, as we look at sort of the sequential progression, now I understand on the industrial side we're in -- on the panel side how sort of we saw the deterioration there, that's fairly consistent with what we've seen with the other companies. In some of the other business units, whether it's research or diagnostic, (inaudible) of services we saw a relatively, you know, drastic deceleration queue over queue. Has that made you think at all differently about how the day's impact affected you in Q1 and in turn what it will have when it reverses in Q4, or was there something else going on in some of these business units? I know you noted some of the maintenance part of services, but some of the kits and some of the other consumables pieces that caused kind of a relatively drastic kind of flip.

Yes, well let me take them one at a time. So, I think in the service instance, it was probably the days benefiting Q1. I think we sort of mentioned that in Q1. We thought 11% was probably high, and we thought it was, you know, probably a mid-to maybe, you know, high single digit growth otherwise. And that's pretty much what we saw in Q2. And just to remind you, this doesn't flip for us in Q4. This is not a situation where we put days in Q1 and it reverses in Q4.

Right. You have one day left --

We just happen -- yes, we just have extra days because we're on a fiscal calendar. But anyway, so I think the service is -- the performance here has been fairly consistent, and I think if you look at the Q1 growth versus Q2 growth, it's probably just the -- the extra couple days we've had. In the case of bio-discovery, it was really more of a -- I would say there was two factors. One, it was a function of Q1 and Q2 '08. And I think we tried to mention this last quarter. I don't know whether we were, you know, sort of specific as -- or people understood as well, but if you looked at Q1 '08, we were down 7% in bio-discovery. And we grew low double digits so we had a significant improvement. And that was a big driver to the fact that we were flat in Q1. If you look at Q2 of '08 bio-discovery grew 8%. And so, in -- in 2008, we went from minus seven to plus eight from Q1 to Q2. And we suspected that was going to be an issue, and that's why we guided in Q2 to sort of mid, down mid-single, I think we were sort of guiding it sort of down 5%. Now, having said that I think bio-discovery was a little lower than we thought fundamentally because we believe some of our academic customers did delay some instrument purchases to -- in order to qualify them under the stimulus package. So, I would say bio-discovery was a little lower than we thought, but not -- not significantly. And in fact, if you look at the business by instrument and reagents and service, you see the consumable reagents and service actually up low single digits, and you look at -- and the instrument business, it's down quite significantly. Sort of down double digits. And so, my sense is in bio-discovery what you'll see is, you know, a return to, you know, more positive growth in the back half even though having said that we have some difficult comparisons, as well. I believe in the third quarter of '08, bio-discovery was up mid-teens. So, I think it's really more of a function of looking at what happened in '08.

Okay. And then on the panels business, you know obviously that's been a market that's been relatively volatile for sometime and has been deteriorating. So, you you know you built out capacity, you know, 24 months ago. We ramped up. Now we're going through a bit of an industry contraction. I mean I realize the top line is going to be constrained. How should we think about that relative to the margin profile and what that's going to do to sort of constraining some expansion across the segment?

Well, I think it puts a lot of pressure on us in the back half. I think quite frankly in the first half, the business did a good job of taking their costs out as much as they could. To offset what we saw was probably about a 20% decline in the first half. And they did a nice job of holding their margins in there. I think -- and as I mentioned, we're going to see probably another step down here in the back half. It's going to be much harder to take the cost out that we did in the first half. So, I think it will have an impact on our margins. And that's probably one of the bigger contributors to the fact that in the back half of the year we do not expect to see margin expansion, while in the first half we were able to despite the revenue decline.

Okay. And then lastly, on the tax rate, it's a pretty big delta from what the original expectation was. So, sort of what happened -- was it in the planning process? I mean, was there something that drastically changed in Q2 from a mix perspective? I'm trying to understand.

Yes. I think -- in fact if you look at the first half, we saw some of it in Q1, but it was confirmed in Q2. So, I think probably the easiest way to think about this is we've probably got 40% of our income that is generated in tax advantage areas. And most cases this is the far east. And that has now gone to instead of being 40% of our income being more like 30% of our income. Because while our income has been about the same, it's shifted from businesses that do their production in Asia to businesses that don't do their production in Asia. So, that 10% shift, if you look at the tax rate deferential between where we have sort of advantageous rates it's about 20 points. So, its driving our tax rate 200 basis points relative to the plan. And if you look year-over-year, it's even more than that. But thats fundamentally whats happened.

But I guess just relative to what you saw in Q1, why the adjustment wasn't done then, I guess it's just because you got it confirmed in Q2 and now you have adjust back half as well --

That's right. And also keep in mind we were flat in Q1 and down nine in Q2. And a lot of that further degradation of revenue is in businesses like analytical instruments and elimination and detection. And quite frankly, that's where a lot of the production occurs in the tax advantage areas.

Okay, great. Thank you, Rob.

Okay.

And our next question comes from the line of Jon Groberg. Please proceed.

Hi, good afternoon. Thanks for taking the call. Hey, Rob, if I look at the guidance just kind of the walk through and from the EPS to the end of the year, it looks like you are -- if I'm looking at it right, are you expecting to take maybe some more restructuring charges or are those just the ones that you took in the first half? Or is there more restructuring given kind of the worst outlook?

We've done some things already in Q3 that will flow through. But that's not reflected in the sort of adjusted guidance.

There's was just an adjustment for restructuring charges. So, that's not in the guidance. Are you maybe even being a little bit more aggressive on the restructuring, that what you're saying?

I'm not -- not clear what your question was there. Maybe I'm not --

Relative to the guidance that you provided in the --

Yes?

In your press release, are you planning any more -- is there opportunity for or are you planning any more restructuring?

No. Not more than what we've done already. As I mentioned, we've done some early this quarter.

Okay.

Early in July. But that's factored into the guidance.

Okay. Okay. That was what I was -- what I was after. And then if you look at on the -- it sounded like you remained fairly positive still on the Viasil business, that that was hanging in there okay.

Yes. I think we looked at -- actually for the first half, we're still -- you know, we still did double digits, down a little bit in Q2 relative to Q1, but we're still at double digit growth rates.

You said mid-single digits in the second quarter, right?

Mid-single in the second, right.

Now, if you grow mid-single digits for the -- I know there was potential for a lot of gross margin leverage in that particular business that could pull through, does it change -- if you -- is your assumption that you stay at kind of mid-single digits or that you kind of --

Yes. I think that's right for the back half. And to your point is we can still get good margin expansion there just -- and I think I mentioned this first quarter. Viasil is now at the higher operating margin level than the corporate average.

Uh-huh. So, even if you -- that slows down a little, you still are going to continue to get that leverage?

Yes.

Okay. And then can just talk lastly about -- on the actual neo-natal screening, I know that was maybe a concern given state budgets, but it seems like you're feeling a little bit better about that. Can you maybe just talk about --

Yes. I think that did okay in the quarter and, you know, it was sort of like mid-single was the newborn screening. And I think as we get into the latter part of the year here I think that's going to return to sort of a high single low-digit growth.

And the confidence -- what is the -- I just remember before you saying you were a little worried about budgets. And so what gives you the confidence -- ?

Yes. I think we're starting to see some of that lighten up a bit. And if you recall, I mentioned toward the end of the year there was some destocking of reagents that was going on. I think we're through that cycle. And we're also seeing some good growth in Asia that I mentioned. Both China and Korea although -- granted off a relatively low base, were up over 20%. And we're starting to see opportunities to expand in that region of the world.

Okay. And then last question any progress -- you have these businesses that I know you wanted to try and sell. Any -- kind of what's the -- any progress there, or what's kind of the outlook with those businesses?

No. I think they continue well. We've got a couple of people looking at them. And my expectation is, you know, we should be able to close something by the end of the year.

Okay. Thanks.

Okay. Thank you.

And our next question comes from the line of Quintin Lai with Robert W. Baird. Please proceed.

Hi, good afternoon.

Good afternoon.

When looking at how you set the outlook for the back half of the year, so on the industrial side you kind of mentioned that you're not expecting much on the chemical side. Is -- do -- I guess when that business starts to come back, is there a lag effect for your equipment? So, I guess, you know, we have to wait for visibility for that before we then begin to see visibility for a return for you guys?

Yes, you know, I think so. And my own view is the longer that the delayed capital expenditures occur, the more rapid the increase should be because as you know these are -- these things do sort of either wear out or become technologically obsolete. So, you know, we can't sort of defer forever here. So, I think thats right -- I would say that's both on the instrument side as well as the component side.

And then with respect to your expectations in the back half for food safety and water, you know, they are several initiatives like tomorrow there's going to be a special thing in DC for food safety. What are your expectations and as you set your expectations, does that bake into any -- some of these new initiatives that being circulated on the hill?

Yes, so I would think generally speaking, and you probably get this sense -- we've got fairly modest expectations for the back half of the year. And while you can sort of see a lot of information in the media that would suggest that the back half is going to be stronger -- in fact I saw -- I think the headline in "Newsweek" said the recession's over, you know, I would say our underlying data, you know, our orders and our leads would not sort of suggest that right now. Now, granted I don't know that anybody's visibility is great. But so I guess our -- our position is we're sort of rooting for the media, but sort of planning based on the data that we're looking at. And so, we're being fairly I would say maybe conservative but maybe realistic on the back half. And not assuming much pickup in either the industrial markets, clearly not the medical imaging markets. And probably not significantly on the environmental markets.

Alright. Super. And then finally, just would love to get your thoughts as much as you can share on, you know, consolidation given the news earlier this week about Agilent and [Variance].

es. So, I would say first of all its probably not appropriate to comment on sort of pending transaction but I would say generally, when you think about the analytical instrument industry , you really compete there I would say on level of service, quality of product offering, and probably application knowledge. And I would say, you know, we feel pretty good about our position in those areas. And I would just sort of leave it

Alright. Thanks.

Our next question comes from the line of Isaac Ro with Leerink Swann. Please proceed.

Hello, thank you for education the question.

Okay.

First one on medical imaging, you know, the initial proposals for CMS reimbursement suggested that we might see a little more pressure on reimbursement for various medical imaging applications. So, I'm wondering, is it -- a lower reimbursement in environment maybe heading into next year they bake into your assumptions for that business? And, you know, are you looking for any changes there that might impact demand for your products, you know, relative to just normal hospital CapEx pressures?

You know, I would say at this point, you know, we're focused probably on the next six months and maybe the early part of 2010 from sort of a production loading perspective. And I would say that's not really been factored into yet quite frankly because we're not at the stage now. We're sort of thinking about how we would load the fad for 2010. And obviously that will be a consideration. I would say right now as I mentioned it just seems that the demand generally for the imaging instrumentation is down quite significantly. And I think it's a combination of pressure on hospital budgets, and the continued lack of financing available.

Right. Okay --

So it's probably -- those issues are probably a little bit outside our planning horizon right now.

Fair enough. Okay. And then if we could switch over to the one source services business. If I remember correctly you guys had a huge second quarter '08 there. So, is it fair to say that that lower growth rate -- I think you said mid-to low single digits I believe, was a function of a tough comp, and could we maybe see a better or reacceleration in the growth rate there for the back half?

Yes. I think it's fair. I mean I think across the company if you'll recall we were 10% organic in Q2 of '08. And there was a number of businesses that did quite well. So, I think that's clearly having some impact on our Q2. And I think we would expect service to be up a little stronger in the back half.

Great. Okay. And then if I just -- I think you might have -- or in Andy's comments that you made some cost reductions here initially in the quarter. And I think he said that we could see flat sequential operating expenses, is that what he said?

Yes. That is. That's correct.

Great. Okay. Those are all my questions. Appreciate it.

Alright. Thank you.

And our next question comes from the line of Derik De Bruin with UBS. Please proceed.

Hello, good afternoon.

Hello, Derik.

So, going to the service business, if I remember correctly and I'm not saying that do, weren't you -- didn't you guys have a pretty big contract with Sheering? And are you expecting any -- I mean have you fully accounted for any of the big pharma consolidations in your outlook?

Yes, actually, we think the -- at least the pharma consolidation that's occurred so far is actually been -- will be helpful to us. And so I think -- if anything we think the move toward a consolidation is -- plays well into our service business, not only from a one source perspective but as you'll recall about a year and a half ago we invested in sort of a relocation and a recalibration company. And so we're not only getting -- we think growth from the standpoint of as these companies consolidate they're looking to do more of this type of work, but also the actual consolidation of the space is actually providing growth for us.

Right. I guess is -- but do you have -- you know have you received word from the consolidating companies that they're going to continue on with their contracts?

Yes.

Okay, that's what I was going for, thanks. So, what's your estimate for the Fx impact in the second half in Q3, Q4? I mean --

The bottom line?

Top line.

I think top line we're assuming that Fx stays pretty much where it is in the second quarter.

Alright.

And it's a de minimus impact on the bottom line.

Right.

Probably $0.01 or less.

Yes, so that's, what -- so thats about down (inaudible) in 3Q and then like plus 1 in 4Q?

Yes. Yes.

Alright. Alright. And I guess, you know, you've -- I mean, as a result of some of the restructuring and some of the discontinued operations, I mean you've seen some really good gross margin improvement. I guess you ended the last year with about a 45% gross margin. Is that -- are you expecting that margin to hold in there for the full --

Yes, yes. I believe for the back half we should be able to hold that margin.

Okay, and -- and what was the contribution of the annual sales for the businesses you've acquired?

About a percent.

For the -- I'm sorry, in total of the trailing 12 month number so I can factor it in in terms of the forward look.

Say that again.

I just want to know how big were the businesses were that you acquired? They're about a percentage of sales in the quarter. I just wanted to know what they was on an annual basis?

I'll tell you what why don't I -- Derik, this is Andy. I'll circle back with you and get you that number. I don't have it right in front of me.

Okay. Thanks.

Sure.

Okay.

And our next question comes from the line of Rob Hawkins with Stifel Nicolaus. Please proceed.

Good afternoon.

Good afternoon.

I guess -- can we go a little bit more into the high end instruments and where you guys are see something demand. I mean, what are you guys experiencing either on either side, on either the environmental or the health side as being kind of must-have pieces of equipment for folks in the downturn?

I would say the area in the bio-discovery that we continue to do quite well is on the cellular imaging side. So we -- the operating instrument continued to do quite well and then we came out with a new product in January which is sort of a lower priced oper which we call the operetta, thats doing quite well. So I would say those are the areas, actually, even some of our products in the very sort of high (inaudible) screening areas, the viewluxes, some of the higher ends are also saw some decent demand. So, I would say that's on the -- on the bio-discovery side. On the environmental side, it appears interestingly enough that the demand is for the higher end, more sensitive instruments. And that's why where you're seeing -- at least with what we're seeing higher growth in those areas. So, that would be Icpms -- those types of things that are sort of provide you more sophisticated -- sensitivity.

And are you guys seeing anything -- there's been a lot of talk obviously about the stimulus related to the health side of research in NIH. There's another $40 billion that's running through the Department of Energy that seems to fall over into a bunch of other areas. Is -- are any of -- are any of those dollars showing up in any of the discussions among your sales force?

I think a little of that in the alternative energy areas. We're seeing some discussions around that area. But I wouldn't say it's significant dollars for us yet, but there are discussions around that area.

And timing related to that, is that something that's more of a 2010?

I think so. I think it's 2010. Maybe a little bit at the tail end of this year but mostly in 2010.

Alright. Thanks, I'll jump back in the queue.

Okay.

And our next question comes from the line of Peter Lawson with Thomas Weisel Partners. Please proceed.

Rob, just wondering if I could continue the question on the stimulus plans. You seen any benefit from Chinese stimulus plans, and --

Yes.

And any hospital buildouts in China?

Yes. I think we have (inaudible) seeing some benefits from the China stimulus plans. I don't know if Andy mentioned it, but our China business was up fairly significantly in the quarter, close to 20%. And clearly that is being -- the stimulus money is having -- you know, is causing some of that.

And then just on the pending industry consolidation, how did you think that's going to change your strategy in any way or what's going to happen to pricing in the industry?

So, I sort of mentioned it before. I don't know at this point whether it necessarily has a significant impact on our strategy because like I said I think it's really on sort of application knowledge, quality of product and service, and, you know, I think that's really at the end of the day is really what drives the buying decision from the customer. And, you know, I think in the short term people can make some pricing decisions, but over the long term, I think they're really looking for the level of service and the application knowledge and merely the continuous -- to continue a relationship that you have. I think that's increasingly becoming more and more important.

Thank you. And just just a question for Andy, the impact on the bottom line from Fx or any benefits from hedging this quarter?

For the quarter, there was basically no impact. From either.

Okay. Thank you very much.

(Operator Instructions) There are no further questions in queue at this time.

Okay, great, thank you. So, as we did in first half we'll continue to manage the current economic environment through focusing on cash flow, you know, driving our consumable and region service business and trying to contain really all the non-customer related costs while continuing to invest in innovation and high growth areas. Really trying to remain committed to a balanced approach while providing the opportunity to build an even stronger company and one that's targeted on not only high growth rates but improving the health and safety of people in the environment. So, thank you for joining us today. This concludes today's call. And have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and everyone have a great day.