賽默飛世爾科技 (TMO) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Thermo Electron Q1 earnings conference call.

At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following today's presentation.

It's now my pleasure to turn the floor over to your host Tim Corcoran.

Sir, the floor is yours

Thank you all for joining us today and also is Marijn Dekkers, our President and Chief Executive Officer, Marc Casper, VP-Life and Laboratory Sciences Group, and Theo Melas-Kyriazi our Chief Financial Officer.

Please be aware that this call is being webcast live and will be archived on our website www.thermo.com until May 28th, 2004.

To reach the replay of the call on our website, click on 'About Thermo' then on 'Investors'.

Please also be aware that a copy of the press release, setting forth our first quarter 2004 earnings, and future expectations is available in the 'investors' section of our website under the heading 'press releases'.

I would also like to remind everyone that we are hosting an Analyst day on May 18th at 9 a.m. at the Intercontinental the Barclay in New York City.

Please email us at investorrelations@thermo.com if you haven't already registered.

I would like to begin the call by reading the Safe Harbor statement.

Various remarks that we may make about the company's future expectations, plans and prospects, constitute forward-looking statements for purposes of the Safe Harbor Provision under the Private Securities Litigation Reform Act of 1995.

Past results may differ materially from those indicated by these forward-looking statements, as a result of various important factors including those discussed in our form 10-K for the year ended December 31, 2003 under the caption forward-looking statements.

Which is on file with the SEC and available in the investor's section of our website under the heading 'SEC filings'.

While may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so.

Even if our estimates change, and therefore you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

During this call we'll also be referring to certain financial measures not prepared in accordance with GAAP accounting principles.

A reconciliation of non-GAAP financial measures used on this call to the most directly comparable GAAP measures is available in the press release setting forth our first quarter 2004 earnings and future expectations.

In the table of the company expense release, in the 'Investors' section of our website www.thermo.com under the heading 'press releases'.

Related information is also available in the investor section of our website under the heading 'financial reports'.

Now I'd like to turn the call over to Marijn.

Thank you Tim.

Good morning everyone.

Thanks for taking the time to join us today.

I am very pleased to report that we started 2004 strongly with some excellent results.

And we're excited because a few things are clear here.

One, it's clear that our markets have improved.

Also that our growth initiatives are beginning to pay off.

And it's also clear that the productivity momentum that we have had in the past three years is continuing.

So let me go right to the results.

As you can see in the press release, we had a number of highlights in the first quarter.

First highlight was that we reported revenues up 16% to $582 million.

Our organic revenues were up 5%, which is the first time that we have had organic growth since the second quarter of 2001, so quite a while ago.

Adjusted EPS increased 32% to 29 cents and our adjusted operating margin rose 160 basis points to 11.6%.

So all in all it was clearly an up quarter across the board.

Let me quickly review the segments of three segments.

When we look at life and laboratory sciences here we have 22% revenue growth and 5% organic growth and this segment is clearly now the core of the company with 63% of our revenues.

The pharma and biotech end markets have continued to improve, it already started last year but the trend has continued.

And also our industrial laboratory customers clearly have more money to spend.

In addition to that our growth initiatives in new product development, key account management and services all under the single Thermo brand are clearly paying off in this segment.

In the measurement and control segment, we have 1% organic growth and things are looking better there across most markets as well, although not as robust yet as in life and laboratory sciences.

We are seeing a measurement in control that our customers are beginning to reinvest in new plans and equipment, as their capacity utilization increases due to the improving economy.

And then the optical technology segment, we had a terrific quarter there with 19% growth in revenue.

Spectrophysics has become a positive contributor to our earnings again.

The semiconductor equipment and microelectronics customers are back in the game, and also our hard work to improve operational efficiency in spectrophysics is paying off.

I want to say something about strategic acquisitions just briefly.

In the Q4 of last year we did three acquisitions to add products and services that compliment our existing capabilities.

We acquired Jouan SA, and that is part now of our bioscience technologies division.

We acquired LMSi for our informatics and services division.

And we acquired the Personal Dissymmetry business from Siemens for our environmental instruments division.

And all of these three acquisitions could be described as bold on acquisitions and are now completely integrated into Thermo's business processes and in the numbers that we are reporting.

Now last week we announced another acquisition, a company called U.S.

Counseling Services, which gives us very important new capabilities in laboratory services.

And I would now like to hand over the floor to Marc Casper, who will give you a quick overview of that acquisition.

Marc is the President of our Life and Laboratory Sciences group.

Marc?

Thank you Marijn.

Since we have talking quite a bit about services over the last six months, we thought it would be useful to give you some details on the acquisition we just completed and to review where we stand on services.

We completed the acquisition last week of USCS Equipment Technology Solutions, an asset management service provider.

Founded in 1969, USCS originally focused on the healthcare market and in 1999, they entered the analytical and research laboratory areas of pharma and petrochemical companies.

And have been recognized as one of the most innovative services providers.

Today 2/3rds of their revenue comes from analytical and research laboratories.

We have worked alongside USCS for several years, and have been continuously impressed by their team and the impact that they have on our mutual customers.

USCS helps many large pharma customers manage life cycle costs of laboratory instruments, by providing them with data on instrument performance, by tracking usage, service history, the location of assets, and managing the maintenance relationships of everything in a specific lab or on a specific site.

This is the second acquisition in the last six months in the services area at Thermo.

We have been adding to our traditional capabilities of maintaining, repairing and supporting our installed base of Thermo products.

In November we completed the acquisition of LMSi, which brought multi vendor service capabilities, instrument validation and regulatory consulting services, to bring more value to our customers and to compliment our already strong services offering.

With USCS' strong quality focus and track record of delivering substantial value to their clientele, we are excited to add these now capabilities to the Thermo laboratories services portfolio.

Thermo now has over $300 million in laboratory service revenue, served by close to 1,000 field technicians and specialists.

The business delivers strong predictiblepredictable financial results, high EBITDA margins, and strong returns on capital.

From a strategic perspective, it's an important piece of providing totals solutions to our customers.

We believe the addition of USCS, along with the previous mentioned capabilities, positions Thermo as the leader in laboratory services, and to benefit from the growing outsourcing trends from our customer base.

In terms of the financials of the acquisition, Thermo paid $78 million in cash, subject to post closing adjustment.

The net purchase price was $75 million after adjusting for $3 million in cash acquired with the business.

This represents a 1.3 times multiple of 2003 revenues of $57 million.

The business has delivered double digit top line growth over the last three years, and has operating margins in the 10-12% range.

I will now turn the call back to Marijn

Okay, thanks Marc.

Before I hand over the comments to Theo for the details on the financials, let me just summarize our EPS guidance.

With our 29 cents in the first quarter we are obviously off to a great start of the year and we have no indication that this positive trend will change.

For the second quarter we expect to continue to do well and report adjusted EPS of 29-31 cents.

And for the full year we are maintaining our guidance at $1.23-1.28.

Now to some of you this may sound conservative, but we think it's simply too early in the year to adjust our full year guidance at this point.

So now I will turn the call over to Theo to give you more details on the financials.

Thanks Marijn and good morning everybody.

We are obviously very pleased to start the year on a very strong note.

Marijn gave you some of the highlights of our performance to which I want to add strong cash flow generation in the first quarter.

I'm going to address that in some more detail in a few minutes.

So let me take you down the P&L here.

I am going to start with earnings: adjusted earnings of 29 cents, GAAP earnings of 26 cents, and our press release or course has a detailed reconciliation between GAAP income and adjusted income.

I just want to point out that we had much lower restructuring costs than in prior quarters as we committed to you.

In terms of revenues, revenues increased $82 million year-over-year to $582 million, that's a 16% increase in revenues driven by strong growth in life and laboratory sciences.

Organically, revenues were up 5% and again to just repeat it that excludes FX and excludes net acquisitions and we have positive organic growth in all three of the segments.

We are clearly seeing the benefits of some of the positive trends in CapEx from our customers and that is pretty much across the board in the markets that we address.

We are also beginning to see the results of our increased intensity and focus on driving top line growth.

We have talked about this to you on the past few earnings calls, we have been making additional investments in sales and marketing to sharpen our commercial execution.

And we have talked about key account management, about our new labs initiative, the focus on service, our investment in demo capabilities, and in the brand, all of this is starting to have an impact on our revenues.

Now let me just quickly go to the three segments.

In life and lab sciences, we have positive growth in all of the divisions and in total 22% reported revenue growth and 5% organic.

I want to highlight continued strong performance in Mass Spec in the quarter with excellent growth in revenues and bookings, and that is across the board in eye traps, triple quads, and in hybrid instruments.

We also saw solid organic growth in the quarter in Spectroscopy and in our informatics and service business.

In measurement and control, we are also seeing a general strengthening of the markets that we address on the industrial side.

The 1% organic revenue growth may not seem like much, I think it's more meaningful to look at sequential revenues.

And here on a reported basis, sequential revenues were up 5% versus the Q4 which is usually a seasonally strong quarter so that obviously makes us pretty optimistic and we are pretty encouraged about the rest of the year.

On the optical technology segment, reported revenues were up 18%.

FX translation and a divesture that we did last year pretty much offset each other, so that organic growth in that segment was 19%.

That stems, and Marijn mentioned this, from strong demand both from the industrial side, from our industrial customers, and the microelectronics side.

We had very strong performance in Asia in the sector and we saw good rebound in our North American business.

In terms of bookings, bookings were very strong, up 20% versus the first quarter last year and organically bookings were up 9% with solid growth in all three segments.

Our book to build was exactly 1.00.

The geographic trends are quite similar to what we reported to you last quarter.

Asia, for us, remains the strongest geography.

We have actually seen an acceleration of growth in Asia in the first quarter and that is driven by continued strong growth in China and solid growth in Japan, which that is somewhat of a change.

Japan was not that strong for us in 2003.

North America is fairly strong and in the life and lab sciences segment, actually had solid growth, so quite strong.

Europe is the laggard and continues to be mixed for us.

And there, maybe not surprisingly, the economic recovery is lagging what we have see in North America, so Europe for us is somewhat weak.

Let me quickly go down the P&L with a few comments.

Our adjusted gross margin were at 45.9% in the quarter, up over1% compared with year-ago quarter and up sequentially as well.

And this is a very positive sign that we're able to leverage our top line growth and of course, the improved gross margins also reflect the benefit of our productivity initiatives.

SG&A was 27.4%, up slightly from the year-ago quarter and all of that increase in percentage SG&A is driven by the life and lab sciences segment.

That ties to the commercial initiatives to drive the top line growth and market share, which we talked about.

If you look in dollar terms and I just want to spend one second on this.

SG&A was up $23 million Q1 over Q1.

So that's a big increase, 75% of that is FX translation in Jouan, but a quarter of that is decisions that we made to increase sales and marketing expenses to drive the top line.

So, still a meaningful increase in SG&A on an apples-to-apples basis, but 3/4 of the increase was FX and Jouan.

R&D was 6.8% of revenues.

In dollar terms, R&D spending was up slightly on a sequential basis Q1 versus Q4 of last year.

That increase mainly reflects the inclusion of Jouan's results in our consolidated numbers.

Back to percentage of sales if you think of that 6.8% is just below our 7% target and we're obviously leaving that target unchanged.

Adjusted operating margin was 11.6%, up 160 basis points with all three segments contributing.

Life and lab sciences was up from 14.4% to 14.7% and the acquisition and the results of Jouan and LMSi had a negative impact of point 4%, on the life and lab sciences adjusted margins in the quarter.

The businesses are doing well.

The integration is actually proceeding well, but they did not start with the kind of margins that we have in our life and lab sciences business, and as we see the full effect of the integration later this year, we expect the margin from the acquired businesses to increase.

In the measurement and control segments, we saw a slight increase in our adjusted operating margin from 9.7 to 10.0.

That was driven by better margins in our environmental instruments business, which focuses on water quality, air monitoring, security and radiation monitoring.

Let me say one more thing about restructuring costs.

As you remember, we committed to you late last year that restructuring charges would be down significantly as we entered 2004 and that is just what has happened.

In the quarter we have $3.2 million of restructuring costs and these were primarily tail actions for restructuring actions that we undertook in 2003.

And then in addition to the $3.2 million we had $2.4 million in cost of sale charges that related to purchase accounting for Jouan's inventory.

Below the line -- below the EBITDA line, the items were slightly unfavorable compared to last year.

Our tax rate was down a little bit, but that was offset by higher net interest expense and higher average diluted shares.

And that means that our EPS growth in the first quarter and you may remember that was the same case in Q4 of last year, all came from operations.

That is a very important point that I want to underline.

All of the 7 cent increase in adjusted EPS from 22 cents to 29 cents comes from higher adjusted operating income, not improvements below the EBITDA line.

In terms of balance sheet and cash flow, we started the year on a very strong note.

We generated $49 million of GAAP cash flows from continuing operations in the quarter, up from $18 million last year.

If we look at free cash flow and that is subtracting capital expenditures we had $42 million of free cash flow in the quarter compared to $7 million the year before.

The free cash flow was slightly lower than net income and that is our target for the whole year.

Slightly lower in the first quarter, primarily due to annual bonus payments.

If you look at cash and debt, things haven't changed very much.

Net cash up to $170 million, that is $440 million of cash and $273 million of debt.

Little change.

The impact of our net cash flow was added to liquidity on the balance sheet.

Receivables 71 days, down from 74 in the comparable period last year.

So that's a positive trend.

And inventory turns 3.5 times, also an improvement from 3.2 times in the year-ago period.

And if you look at the balance sheet you will see that we had an increase in acquisition-related intangibles and I just want to remind you that when we did the acquisition of Jouan in the fourth quarter we had not finalized the purchase price allocation, and as we did that this this quarter, there was a reallocation of $35 million of intangibles from goodwill related to Jouan.

Let me just finish by reiterating the guidance that Marijn gave you.

Adjusted EPS for the second quarter of 29 to 31 cents.

No change in our full year guidance of $1.23 to $1.28, and we are obviously pleased with the strong start to the year.

We are entering the 2nd quarter with strong momentum, based on good bookings in the first quarter and based on strength in capital spending in the markets we addressed.

We are very optimistic that we can deliver strong financial performance for the rest of year.

And with this operator, why don't we open this to Q&A.

If you have a question, please press star then one on your touch-tone phone.

If your question has been answered, you may remove yourself from the queue by pressing the pound key.

We do ask that you pick up your handset to provide optimum sound quality.

Once again to ask a question, please press star and then one.

Our first question is coming from Paul Knight of Thomas Weisel Partners.

Please, go ahead with your question.

Hi guys.

Hi Paul,

Could you talk about [want of ] SpectoscopySpectroscopy products are doing particularly well?

This is Marijn, Paul.

Both in elemental and molecular spectroscopy products, elemental are very much used for heavy industries, steel industry, for instance, is a big customer.

And molecular are more used for some life sciences applications and chemical applications and we have seen a rebound in both areas, maybe more strongly on the elemental side than on the molecular side.

Is this China and could you address India?

It's China.

It's India.

But it's really across the globe this pickup in spectroscopy.

But China obviously, on the elemental side is very strong, because the steel industry in China is still going crazy.

No slowdown whatsoever.

Could you talk about where you feel operating margins are going sequentially, Marijn?

Sequentially there will probably be an uptick.

Last year, in the first quarter we had 10% and in the second quarter 10.8%.

Now we have in the first quarter, 11.6% so we're 160 basis points higher.

I don't know if we'll be 160 basis points higher again, but I think sequentially just like last quarter they it will be up.

Thanks.

Last year, I mean.

Thanks.

Okay. .

Thank you.

The next question is coming from Vidscek Cashna of Argus Partners.

Hi.

Sir your line is live, do have you a question.

Yes, I do.

Good morning.

Sorry about that.

I had a question in terms of the acquisition, the asset management provider.

It seems to me by doing the math that should be accretive by a few cents this year, but just wondering what are your thoughts on that were?

Vivec, it's Theo and if you do the math we'll own the business for about nine months, and if you do the math it should be roughly one penny accretive.

So that is the expectation.

The business has grown and we expect to continue.

We expect it to continue to grow and continue to deliver, at least in 2004, low double digit margins.

Any comments Theo on the book to bill by business?

It seemed like 1 was the whole company but can you characterize it by business?

I will give you a little color here.

It was 1 also in life and lab sciences.

It was slightly below 1 in optical, and slightly above 1 in measurement and control.

And I want to point out it was a real good bookings first quarter.

Fourth quarter is the strongest for us, first quarter is a good quarter, but we were really quite happy with our bookings.

Okay and just in terms of the sharecountshare count are you going to continue to buy back shares or expect it to creep up from here?

The sharecountshare count is as follows: Basic shares increase by half a million during the course of the quarter.

We bought about back 1.1 million shares and there's a little bit more than 1.5 million shares that were created through stock option exercises by employees.

And the share count may creep up a little bit, we don't expect it to change significantly, as we look at the next few quarters.

Great and a question for Marijn.

Marijn, in terms of looking forward do we expect you to make smaller tuck-in acquisitions or some point the company is going to make a bigger acquisition and strategically how are you viewing it?

I think the small tuck-in acquisitions are a great way to improve the capabilities of our different divisions.

At some point, you know, we could do a much larger acquisition.

But you know, the right opportunity has to come along for that.

I think I wouldn't have said something like that a year ago, while we were still very, very engaged with integrating what we already had, but now that we have come through act 2, so to speak, and we have integrated all of the acquisitions that Thermo did over the years, I think that organizationally we'll be ready to take on a larger acquisition.

Great, thank you and nice job on the quarter.

Thank you.

Thank you.

Thank you, our next question is from Chris Shubitani of JP Morgan.

Thanks very much guys.

Nice job on the quarter.

Two topics one of which I might not have heard clearly.

On the life and laboratory sciences, the operating margins excluding the acquired businesses can you give us a sense of what that operating margin would have been?

It would have been 15.1% Chris, .4% higher than the 14.7% that we reported.

Thanks for that clarification.

On the mass spec business, you may have mentioned and I might not have heard, could you characterize what that growth was, maybe describe a little bit where it’s coming from, and also update us on the level of interest or traction for some of the newer products you began to discuss and introduce this year including multi front end.

Thank you.

Chris, this is Marijn.

As you may know, we don't specifically indicate our growth numbers in mass spectrum view.

We are willing to talk about it qualitatively but not quantitatively for competitive reasons.

We had terrific growth in mass spec, and it was really across the board, as Theo mentioned.

It was on the new linear Ion trap, the new LPQ, on the triple quads, which continue to grow very well and obviously, everything in the LTQST, the hybrid FDMS, everything we sell there is growth automatically because we didn't have the product line a year ago.

And that is doing very well as well.

So we have strength across the board in mass spec.

And if we look at the numbers of our peers, it looks like we appear to be gaining share there in a nice way.

On the corporate customer initiative, where you had talked about targeting your top 15 or 20 large pharma customers that you perhaps could have improved penetration, I know this has been an effort that you've made some progress, can you update on us perhaps the growth during the more recent periods of this initiative -- of that customer segment?

I think last quarter we mentioned in the 20s growth and we had that again this quarter year-over-year.

So we're clearly there on track.

You remember the story and we felt we were under penetrated at the top 20 pharma and biotech accounts.

About a year and a half we started with key account management at those accounts.

We have broadened that since.

But for the last, I would say, three or four quarters we have been growing those accounts year-over-year at a 20% or higher rate so that is working, clearly working.

Lastly, within M&C, I think one of the stronger business has been the radiation detection you did the acquisition of [Phangoben] and could you describe for us what growth trends are like in that business and what you are seeing?

Actually across the board we serve a number of different businesses there.

Obviously, environmental instruments serves environmental applications, water, air quality and then also security radiation, for instance.

To address that first, the security and the water applications are doing very well.

The only area, really in all of M & C that is still weak is the power generation end market.

And our air quality monitoring systems play heavily into power generation for environmental monitoring of air quality.

So that is still a weak area.

And then on the process instrument side, we see where we serve food, beverage, pharmaceutical, manufacturing, and also chemicals and materials manufacturing, we are clearly beginning to see the uptick there of our customers beginning to spend capital again on their factories, on their plants, to stretch capacity or to even build new plans.

And obviously that hasn't happened a lot in the last few years and that is clearly related to the stronger demand for those products.

Thank you for the additional comments

Thank you

Your next question is coming from John Harmon of Needham & Company.

Good morning.

A couple of questions, I was wondering if you could discuss a couple things.

The relationship between organic growth and seasonality, in other words, now that you are back to positive organic growth, do you expect it to stay positive?

Could there be any lumpiness in it or an acceleration, and some of your businesses that are normally seasonally down in the first quarter were up quite nicely and is there some pent up demand that will overcome normal seasonality in the intermediate term?

I think the nice thing about looking year-over-year is that you don't have to worry about seasonality.

Sequentially we have huge seasonality, Q4 is always by far our strongest quarter, particularly in life and laboratory sciences.

You know what you see is what you get here.

We are up 5% organically year-over-year and there is no seasonality impact of that and I think there is no reason for us with a 9% increase in orders in Q1 to think that that's slowing down at this point.

Okay.

Thank you and regarding your optical business, are you done making productivity improvements and is any subsequent margin expansion really just a function of strength in their end markets from this point on?

No.

We are not done with productivity improvements.

Spectrophysics, just like every other business in Thermo, has started on path of what we call PPI, practical process improvement, it's Thermo's version of Six Sigma, which really goes into key business processes in trying to make them much more efficient.

The difference between spectrophysics and the rest of Thermo is that we started this at spectrophysics more recently than we started in the other Thermo businesses.

Really, we started doing this when we acquired the remaining 20% of spectrophysic that we didn't own and spectrophysics became a wholly owned subsidiary, and therefore, they have been lagging behind somewhat in the past in their operational improvements.

But the team there is doing a beautiful job now in catching up and the numbers are showing it, both in Q4 and now in Q1.

So we're not done.

But I think the combination of continuous operational improvements and obviously stronger end markets bode well for spectrophysics for 2004.

Okay but it sounds like you are saying it's normal act 3 type improvements from now on?

Oh yes.

Yes.

Yes.

And finally a thought about the USCS acquisition, your rationale, do you see it more as a complimentary business or a trojan horse that gets you inside people's lab and lets you take inventory of what equipment is there and make recommendations when they need new instruments?

Well, you know, Theo is the expert here on Greek mythology and I'm not but I will try to answer it.

Okay?

Basically our customers are faced with all of these instruments from all of these different suppliers in their lab and they have all these service contracts, and with increasing pressure on the productivity and efficiency in their laboratories, they are turning to people like USCS and say can you help us with this?

It's almost like managing a fleet of leased cars, right?

So it's clearly a need.

We have started hearing this from quite a lot of our customers.

But USCS has a beautiful history in doing this, a very good track record and very good credibility.

And we believe that in a combination with Thermo, we can actually improve on those services.

Because in many cases we have the people on the ground in those labs that USCS is serving anyways, so we think there is a nice opportunity here to serve our customers even better.

And that is really the major goal.

When you talk about trojan horse, our customers are not going to allow us to take knowledge that is particularly related to how they are running the business and take advantage of it.

That is not what it's all about.

It's really about a much broader service offering that we know for sure our customers need because they are all telling us and that is why USCS has been a successful business over the past years, building up on the basis of that demand.

Okay.

Thank you very much and congratulations on getting back to organic growth. .

Thank you, John. .

Thank you.

Your next question comes from Daryl Parry of Merrill Lynch.

Good morning guys.

Within life and lab science, could you quantify the growth by life science, industrial, and clinical customers in Q1?

Or give us a sense of how those compares to 5% for the segment?

I will try to do it qualitatively, Daryl.

Basically I would say that life sciences and industrial customers probably grew at about the same rate.

That hasn't been the case obviously in the past few years where industrial was clearly weaker, but the industrial laboratory market has clearly come back and is probably now growing at the same rate of 5% for us as the life sciences market.

Clinical is a little up and down for us, because we have a mix of businesses there and one of the businesses is our point of care diagnostics which is heavily dependent on who is getting sick where, quite honestly.

We had a great, great flu season in the fourth quarter, but some of the other diseases that typically kick in the first quarter like strep throat was very weak.

So people got a lot less strep throat than in the previous year, so they are somewhat lumpy in terms of their order patterns and clinical was slower than we normally expect because of that.

Okay, thanks.

In optical, a similar question, could you just give us a sense of how much the growth was microelectronics semiconductor versus industrial?

I would say there semiconductor and microelectronics are clearly the majority of the growth.

You can see it everywhere and semiconductor equipment industry is doing well.

The microelectronics applications are back in vogue again and that is the major part.

Okay.

And then in M & C, clearly some of those business, particularly the process business, are more later cycle, companies really expand capacity.

How do you expect their revenues there to track over the course of year and what is your visibility on those?

How do we expect revenues to track in -- you know, we believe that we'll continue the top line growth momentum there.

I mean there is not a lot of momentum, 1%, but that will strengthen over the course of the year.

You are right in some of these things are longer term cycle.

First of all, our customers don't go immediately spend $50 million on a plant expansion based on the three months of good orders.

Also, we can get an order, but it doesn't mean that the customer is ready to take on that instrumentation if they are doing a major plant expansion.

We could get the order now and not be called upon until August.

So we tend to have longer lead times in that business than we have on the laboratory or on the optical side.

Yea.

So are you guys just seeing quote activity, from a projects perspective, are you guys just seeing quote activity at this point?

Significantly up from a year-ago.

But not translating to orders yet?

It's translating to orders as well, and that is why Theo said the book to build actually in measurement and control, was higher than 1.

Okay.

Great, thank you. .

Thanks, Daryl. .

Thank you our next question is coming from Franz Tudor of Variance.

Couple quick questions, on the tax rate in the quarter, you came in at 28.2% how should we view the tax rate going forward?

It's Theo and we have kind of guided everybody to expect that our tax rate would be up a little bit from 2003 to 2004.

So in the range of 28-29% where it was in Q1 is our best guess for the year at this point.

Okay.

And then on the SG&A, so I understand that 70% in this quarter was based on the FX and Jouan, how are we viewing SG&A going forward?

I think we're going to continue to make investments in SG&A to drive top line growth, but I think the incremental investment, the rate at which we'll do incremental investments is probably going to decrease, but we are investing.

Our strategy here is not to maximize short term earnings.

The goal is not to maximize Q1 or Q2 earnings, it's to build the company that it will be the #1 player in the market that we address.

We think we are making some smart investments to help growth later this year and in '05 and in '06.

And then lastly, I am just trying to go back through the guidance here again and one of my questions is, is there any update on the potential divesture of the optics division, because sort of just kind of back out through the margins and so forth I am getting that sale on its own would about 1-2 cents dilutive assuming one time sales price.

Do you have any insights or guidance you can provide there?

This is Marijn.

We don't really want to comment on possible acquisitions or divestures.

And then to speculate on what that would do for EPS this year would be another step beyond that.

So we'd rather refrain from addressing that question.

Well, is the intent still to divest that -- are you willing to comment on that?

I think we have said before that spectrophysics is a somewhat different business than the other two segments, because it's in a different marketplace and it makes more components of instrumentation and final instruments.

So it's not from that point of view, you know, core to the strategy of what we're trying to do on the instrument side.

That may lead to a divesture at some point in the future, but there is nothing definitive on that topic at this point

Okay.

And then lastly, I don’t know if you guys broke out - on FTMS, what where the revenues in the quarter and more importantly what is the backlog and the manufacturing capacity looking like on that product?

As we said, we really don't like to give out specific numbers on mass spectrometry and FTMS is doing well, very well.

We have a nice backlog but not so tremendous that we are getting into manufacturing capacity issues at all.

So it's going well, very well received, clearly a strong player in the whole hybrid market now and that is where the comment came from and we really believe we're gaining share there with this product.

And really no issues with respect to manufacturing capacity.

Now, understanding the price sensitivity these days with some of the customers out there and looking at the list price of the FTMS and also this gross margin that you generate, are you going to lower price to take or take additional share or do have enough demand it doesn't warrant that right now and what does the landscape look like for FTMS?

[Laughter] Well, do you want to buy one?

Basically what you do in these cases and we have a unique product here.

So we are trying to address a marketplace right now that is very interested in the capabilities of this new product.

The product costs $750,000 so the people that are buying it see the benefit of writing a check like that.

What typically happens is we're not standing still either and we're trying to of course, improve on our technologies.

Once you then come out with a new and improved version of certain technologies, you tend to bring down the price point perhaps in the future down on some existing technologies.

That is typically how the market works in these instruments and then you attract a different set of customers that maybe could not stretch to afford that higher price but would be in the game to have a somewhat older technology, you know at a lower price point.

But that is how the game is being played in all of these instrumentation markets and that is probably what will happen with the FTMS at some point.

Okay.

Good quarter, thank you guys.

Okay Franz. .

Thank you.

Our next question is from Larry Neighbor of Robert Baird.

Thank you, good morning.

Hi, Larry.

The acquisitions that you have been making seem to have lower operating margin than your life and laboratory science business and these are relatively mature companies that have been around for decades at least in the case of U.S.

Counseling and Jouan.

What is your strategy in terms of improving their margins or are their margins maxed out at lower level than you're doing in the rest of that division?

Well, they're two different companies really.

Jouan clearly has lower margins than our comparable bioscience technology businesses.

So here we have a clear plan to get these margins up relatively quickly to our own margins in that part of life and laboratory sciences.

And the opportunity there is there is sales synergy.

They have some wonderful centrifuge product lines and incubator product lines that we can sell in other parts of the world.

And there is also cost synergy clearly to be had on the Jouan side.

The USCS has slightly lower margins as well.

But you know, we don't have a lot of cost synergy with USCS.

They have the capability that different from what Thermo is doing and this really all about organic growth and serving our customers better in the combined service capability between USCS and Thermo.

So that is not a cost play or an anxiety to get the margins up quickly by a few more percent.

This is really a very strategic positioning in front of our customers it gets us a lot more organic growth in services going forward.

So you would probably continue to look to buy companies with lower margins than what you are seeing recently?

Well, it's not like we're looking for companies with lower margins.

It just happens that they both we thought were a good idea and they both have slightly lower margins; with Jouan's case something we can correct real quick and USCS we are not focused on that particular part of their financial performance.

It's much more about growth.

So it's not like we're shopping around trying to find low margin businesses that we can improve.

I mean, if we do that we would have done a lot more acquisitions than we have so far, but we really tried to find the nuggets that are a nice fit for what we are trying to do strategically and in the process of that, we generate accretion from an earnings point of view.

Thank you.

Okay.

Thanks, Larry. .

Thank you.

Our next question is from coming from Jack Murphy of John Levin and Company.

Good morning.

Good morning, Jack .

When you guys say orders are up 9% in the quarter, what is the time it will take to fulfill those orders?

It is a quarter, two quarters out or does it go further out than that?

Jack, it depends on the product lines, but in general we ship, you know, the majority of our backlog within two quarters.

Gotcha.

And then if we were to look across the mix of business right now, what should incremental margins be on 1 point of revenue growth or whatever, however you look at it?

Jack it's not a straightforward response to this, because it depends if we want to maximize short-term profits or not.

If we’re not we have variable costs that would enable us to drop maybe as much as 50% pretax of additional revenues to the bottom line, but we're making heavy investments especially in sales and marketing to grow over a longer period of time, so that the incremental EBITDA is going to be lower.

But I think we have sort of backed out of the end a lot-- if we get 1% organic growth thrown at us, over and above our planned activity, that typically leads to about 3% of earnings improvement year-over-year.

Gotcha .

So just, you can see the strong -- the orders are up 9% and know you will ship in the next couple of quarters and you know where incremental margins should be, it would tell me and that is not the conservative guidance again, and you have the orders and you know what your incremental margins are, it seems like you must be extremely comfortable with your guidance?

We are very comfortable with our guidance, yes.

Extremely or just very?

Well, my English is not good enough to really know the exact difference but we were very comfortable with our guidance. .

Thank you. .

Thank you our next question is coming from Derrick Bedrum of UBS.

Thanks a lot and I don't buy that for a minute Marijn.

So just a couple of questions, could you just go over, I missed it Theo, the operating cash flow and free cash flow for the quarter again, please?

The operating cash flow before capital expenditures were $49 million for the year and we had $7 million of net capital expenditures so that the free cash flow was $42 million and that is $42 compared with $7 million in 2003 which was obviously not a particularly good cash flow quarter.

But $42 million of free cash flow is a very good start to the quarter for us.

We have had and tend to have a somewhat seasonal pattern with better cash flows in the second half of the year, so we are very happy with that start.

You know, previously you have given us some idea for the EBITDA contribution was for the different businesses.

Last year at this time you were talking about 75% of EBITDA coming from life and lab sciences.

Could you give us a little bit more color on this quarter and what it's looking like?

On this quarter meaning Q1?

Yeah.

If you look at the Q1 numbers and do the math the life and lab sciences contributed about 80% of our total EBITDA.

As we just made the acquisition of USCS, life and lab sciences will increase a little bit in size and proportion to all of Thermo, so I would expect the 80% to trend up a little bit absent any other changes.

Great and could you -- what are you predicting for foreign exchange impact for 2004?

Where do you see the (indiscernible) currencies impacting you?

What we're doing Derrick is we tend to project based on spot rates.

We don't get terribly fancy.

So we'll have a slight positive impact on FX for the year but not very large and, in fact, as you know, the dollar strengthened a little bit over the last month since the middle of the quarter.

So we had a big impact on FX in the first quarter and this is will go down gradually over the reminder of the year as you compare with periods in the year-ago periods where the dollar gradually weakened.

I'm not sure that we have a specific number in mind, but it's certainly a lot less than the 7% we had in Q1.

Great thanks a lot and great quarter

Thank you. .

Thank you.

If there are any final questions, please press star one on our touch-tone telephone at this time.

We appear to have no further questions.

Okay.

Let me just make a few remarks in closing.

We at Thermo are really optimistic about our future.

We believe our company is now operating as a true industry leader and most importantly we still have many opportunities ahead of us.

We talked about opportunities to drive organic growth.

We still have plenty of opportunities to become more efficient and drive productivity in our PPI initiative that we'll talk more about on May 18th.

As a great vehicle to drive more productivity and then the opportunities to make strategic acquisitions that make our business stronger and also enhance our future earnings potential.

So I think we're hitting on all of these three cylinders really nicely and I want to thank you again for joining us today and for your continued support.

Thank you. .

Thank you all for your participation.

That does conclude your teleconference.

You may disconnect your lines at this time.

Have a great day.