Waters Corp (WAT) 2001 Q1 法說會逐字稿

WATERS CORPORATION CONFERENCE CALL

Good morning and thank you for holding. All participants will be able to listen only until the question and answer session of the call. This call is being recorded at the request of Waters Corporation. If anyone has any objections, you may disconnect at this time. I'd like to introduce your host for today's call, Mr. Douglas Berthiaume, the Chairman and CEO of Waters Corporation. Sir, you may begin.

Thank-you. Good morning, and welcome to Waters Corporation first quarter 2001 conference call. With me on the call this morning, as usual, is Philip S. Taymor, the company's CFO, and Brian Mazar, the Vice-President and Director of Investor Relations for the company. As is our normal practice, I'll cover the quarters operating highlights and some of the evolution of our strategic programs, and then Phil will take you through the financial details, and then we will open it up for Q&A. Before I begin, I'd like to ask Phil to cover the safe harbor language. Phil?

During the course of this conference call, we may make various forward-looking statements regarding future events of future financial performance of the company, in particular, we will provide guidance regarding possible future income statement results of the company. We caution you that all such statements are only predictions, and that actual events or results may differ materially. For detailed discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our present expectations, see out 10-K Annual Report for the fiscal year-ended December 31st, 1999 and 2000, in part 1 under the caption "Business Risk Factors." We further caution you that the company does not obligate or commit itself by providing this guidance to update predictions. We do not plan to update predictions regarding possible future income statement results, except during our regularly scheduled quarterly earning release conference calls and webcast. The next earnings release and webcast is currently planned for July of this year.

Thank-you, Phil. I think as you all know, there has been a large sound and fury concerning the current status of the markets that we serve. There has been much speculation as to how much momentum really exists during this quarter and the rest of 2001, because of that uncertainty within our investor community, we felt it necessary to make a public announcement late March. That announcement reaffirmed our previously stated expectations for the first quarter. Hopefully, you've now all had a chance to review our earnings release, and can see for yourself that the first quarter was another excellent quarter. With topline revenue growth of 17% before currency effects, unfavorable currencies reduced revenues by about 5%, and as a result we reported sales growth of about 12%. Phil will take you through more of the currency details and how we think it affects us for the rest of the year. Suffices to say that currency translation path continues to be challenging. On the strength of our sales growth, and once again continuing success in improving the operating performance of the company, we grew earnings per share by 27%, and once again improved operating margins for the quarter. Once again, our strong performance was led by our Mass Spectrometry product lines, which grew at about 30% for the quarter, and it is clear that the underlying drivers in this piece of our business have continued unabated. We are very encouraged by [quote] and water activity which remain very strong, and is further encouraging that the strength in Mass Spectrometry extends across the entire product line, including Time-of-Flight, Triple Quadruple, Single Quadruple benchtop units, and even the more mature Magnetic Sector product line, which once again showed good growth. The Time-of-Flight product segment maintained the outstanding performance of the past 3 years. Led by the Q-TOF family, we again saw our outstanding growth in the fast growing Proteomics segment. It is also notable that we continue to see strong and building momentum for the Q-TOF and Drug Metabolism Labs, where the Q-TOF provides the leading edge capability for higher sensitivity qualitative metabolized analysis. In the larger market for Quantitative Analysis and Drug Metabolism Labs for Quattro Ultima delivered superb growth again. So, we are seeing both a good strong market demand and a very strong competitive position. The strength in magnetic sectors is largely due to environmental applications which appear to be growing nicely in Japan and in the US. So the things that I have been talking about for the last few years were discovery laboratories, Proteomics Applications, Combinatorial Chemistry, and Drug Metabolism and Drug Development, and the resultant product line ramifications for us were all manifest once again in the first quarter, and we see no current signs of diminishing customer activity. Turning to our Chromatography product lines, we had a good quarter with solid double-digit revenue growth. Demand from the pharmaceutical industry stayed at a high level, and helped deliver strong results in this segment. Our Chemistry product line continues to perform well on the shoulders of our Oasis Sample Prep XTerra Analytical Columns and Purification Media products. In the core instrument area, we continue to see very strong performance from the benchtop LC/MS ZQ. You may remember it was introduced late in the third quarter of 2000, and has been a strong performer ever since. One area which was troublesome for us last year, was our data product line. You will recall that revenues were down in this area for the full-year of 2000. I am pleased that we saw growth in data in the first quarter in the mid-single digit range. And we are cautiously optimistic about the prospects for a more meaningful acceleration as we go through 2001. We plan to launch our millennium 4.0 in midyear, an early indication of customer reactions are very positive. Finally, across our Thermal Analysis product lines, we had what I'd call a staging quarter. Growth was in the low single digits as planned during a major new product transition, in which products we launched late in the quarter. We are excited about initial customer reactions; however, the next few quarters in this product line will be important. In terms of our geographical mix, we had strong growth in every major geography. So there is no apparent over waiting of any particular country in our growth. North America, Europe, and Asia all performed well into the double-digits. On the strategic front, I'm pleased to report that the mew product pipeline is in good shape. As you know, the Pittsburgh Conference in March is the typical kickoff point for new product introductions, and we successfully launched all the products we planned and talked about the last time we spoke. To refresh your memory, the Mass Spectrometry technology area was the headliner, with new products in the Q-TOF family as well as the triple quad family. Most of these new products will begin shipping late in the second quarter, and ship in volume in the second half of 2001. We are encouraged by the universally strong customer reaction to our new product array. And finally, during the first quarter, we entered into an agreement with Sandia Laboratories, whereby we licensed some existing technology and agreed to work together long-term in the field of micro separations. We are very enthusiastic about the potential to link micro separation systems particularly with Mass Spectrometry detectors to achieve higher throughputs and greater efficiencies, both with small and large molecules. It should be noted, however, that the first commercial product here are likely to be several years in the future. At this point I'd like to turn it over to Phil for the financial discussion.

Thanks Doug. Good morning. Once again financial performance for the first quarter of 2001, continued our strong historical track record even in the face of currency challenges which reduced reported revenues by 5 percentage points and depressed the bottom line as well. Sales grew by 17% over the prior year quarter before currency effects. On sales growth of 12% after those currency effects, the company grew earnings per diluted share by 27% from prior year levels, excluding the one-time effects of accounting change in the base period. Sales growth as measured in local currencies was well distributed across the company's geographic regions. From the technology perspective, Mass Spectrometry product sales grew fastest by approximately 30%. HPLC product sales grew at a strong double-digit rate, and Thermal Analysis' product sales is expected to grow in the low single digits versus the prior year in advance of the margins reductions of the revamped new product line. The company's incoming orders growth rate for Mass Spectrometry products were somewhat higher than the rate of sales growth for the quarter, while the company's HPLC orders growth rate was somewhat lower than its [________________] growth rate. Currency reduced reported sales growth by 5% points, primarily due to both weakness of the euro and the Japanese yen, but the exchange rates were to stay at today's levels currency would reduce our second quarter 2001 sales growth rate by approximately by 4 percentage points given prior year base comparisons, and the full-year 2001 sales growth rate by approximately by 3 percentage points. Earnings for the quarter grew faster than sales due to several factors. One, expanding operating margins with productivity improvements across all P&L components contributed. Two, current year interest income versus prior year expense from the cumulative effects of our steady cash flow. Three, 2% tax rate reduction versus the prior year quarter with our tax planning efforts and a shift in the mix of taxable income for the lower tax rate jurisdictions. On the balance sheet side of our results, first quarter 2001 performance was solid. We generated 16.2 million of all in cash flow for the quarter. This amount would have been higher over $35 million if we had not accelerated certain expenditures into the first quarter. We both made accelerated payments through our Mass Spectrometry product vendors in the pursuit of gaining priority treatments, and in addition, built inventory of our recently introduced new products in order to optimize our ability to meet anticipated future customer demand. Inventories were up approximately 10% during the quarter with our aforementioned inventory built plan for our new Mass Spectrometry product in particular. We expect inventories to stay at or grow only modestly from these levels over the balance of the year. Accounts receivables day sales outstanding, increased in a seasonally typical fashion from 68 days at December 31, 2000, to 75 days at the end of the first quarter. We expect day sales outstanding to stay out or decline moderately from these levels over the balance of the year. We remain optimistic and excited about our business and financial prospects in 2001 and beyond. We are obviously aware of the caution expressed by many companies regarding global macroeconomic conditions. Frankly, we have not seen evidence of this in our served markets. We continue to pay attention to this. Our business indicators remain strong. Our outlook is somewhat tampered by the weakness in international currencies with reduced US dollar reported financial results. With all cautionary statements qualifiers, our outlook for sales growth before currency effects for the future remains consistent with our past view; and that is, we expect topline growth for the second quarter of 2001, and full-year 2001 to be in the 14% to 16% growth range. Today's currency rates, if unchanged for the remainder of 2001, would again reduce second quarter's sale growth by about 4 percentage points in full-year 2001 growth, by approximately 3 percentage points. These currency effects are greater than the impact last estimated in January due to intervening exchange rate movements. Current first call consensus estimates call for Q2 2001 earnings per diluted share of ¢33 and full-year 2001 earnings of $36. Although we are somewhat cautious with respect to the foreign currency environment, we are on balance and comfortable with these first call estimates within normal tolerances of 1 to 2 pennies per quarter. Doug?

Thank-you. Tanya, I think at this point we can open it up for Q&A.

Thank-you. At this time we are ready to begin the question and answer session of the call. If you would like to ask a question please press * 1. You'll be announced prior to asking you question, to withdraw your question you may press * 2. Once again to ask a question, please press * 1. Our first question comes from Christian [_______________] of Galleon Group.

Good morning, two quick questions. One, can you just breakdown what revenues you get by various geographic regions, the US, Europe, and the far east or Japan? And, secondly, if you said it, I missed it, did you estimate how much foreign currency cost you in terms of earnings this quarter?

I'll give you approximate numbers on the split of our geographies, 40% to 45% our revenues typically come from the US, about 35% of our revenues come from Europe, a little over 10% come from Japan, I think a little under 10%, maybe as well as 7 or 8 come from Asia, and the balance comes from the aggregate of the other areas of world such as Latin America, Canada, etc. I did not disclose the currency impact on earnings per share, but in response to your question, its an [_______________] thing to determine, since we are always taking actions to try and respond but with that qualifier aside, currency cost is about ¢2 a share when comparing Q1 2001 to Q1 2000.

Thank-you.

You're welcome.

Kevin Tang of Deutsche Bank, you may ask your question.

Thanks, first of all congratulations on early phenomenal results in what has been a tough environment for others, really hats off to you guys.

Thank-you.

All right, I guess my first question is to that end, which is, can you elaborate, if you really look into your business perhaps, may be by end-user segment, there has got to be some weakness somewhere given the economy, and I am wondering, could you kind of talk about your exposure to different end-user industries, and where are you seeing, are there any segments or may be small percentages of the overall revenues where you might be seeing some weakness to just try to help us bridge your results with results of some of your competitors and broad industry participants?

Okay Kevin, I'll take a shot at it, I think if you take our business by product line, and you look at Mass Spectrometry to start with which is where clearly our highest level of growth and some people might assume where risk of follow up could be. The major piece of that business, over 70%, is aimed at Pharmaceutical, Life Science customers, so Big Pharma, Big Bio, and university and Government and Academic Laboratories doing Proteomics, Genomics and such research. Obviously, as I said the sector business is aimed at the environmental applications that tends to be government funded, and is a very, very small piece that in ICPMS and small molecular weight inorganic analysis, so in that segment of that business, we as I think, I try to say it bluntly and Phil reiterated, we see continuing demand, we of course, talked to our customers, big and small, we query them on their budget plans for the year, and I just got through a session with our sales force on what they are saying and how much confidence they have, and all those signs are consistent with what we have seen for the past year or two years. I think those customers say we need to continue to invest in these products; we need to continue to push the throughput, the sensitivity, and the capabilities here. If you look at the Chromatography business, while there is a little bit more of a skew towards some industrial applications, it is still largely the same dynamics. Pharmaceutical and Life Science customers make up the broad majority of our sales. We continue to see a strong consistent underlying demand, if we look at our [quote] activity, our lead activity, in anything it has strengthened a little bit. So as we said we are aware of all these other concerns, although I think there are as many strong reports out their, of companies that are servicing the life science of pharmaceutical market, as they are weak, and I think if you look at the applications, closest to us, I think there is a fair amount of evidence that those underlying dynamics remain strong, and then some companies have their own individual cases of a strong base where they are not going to repeat or shipment problems or something like that, but I think the evidence is not one-sided there, as you look outside of Waters. The Chromatography business does have, I would say maybe 15% of its revenues, call it 15% to 20%, that you would argue as perhaps more economically sensitive that sails into the classical industrial chemical marketplace, and like applications. Frankly, we haven't seen a big falloff in those revenues, but I'd say if you were looking for something that might be where you would look. The 10% or little bit less of our business that's Thermal analysis is classically aimed at that polymer marketplace, and that's one where I think most of the dynamics this year are going to be. The response to our new product flow, maybe we'll see a little bit of dynamic on the economic front, but frankly, we don't see that raising its ugly head just yet.

Okay, that's incredibly helpful. And then, I had a couple of, one related question to that on the financial side. Phil, you mentioned a little bit about order rates just opposed to your actual book-to-revenue, and then there were some [_______________] there, could you repeat that again?

Sure, overall our backlog has not changed during the quarter, but we shipped a little heavier than orders in the HPLC side of the business, and we shipped a little lighter than orders on a Mass Spec side of the business, for no other reason than that can happen sometimes. The Mass Spec order growth rate was closer to traditional revenue growths rates that you've seen in the Mass Spec business and our HPLC order growth rate was a little less than its sales growth rate.

Okay, are these big enough that you had portended a shift in the future quarters or not a big deal?

We think the dynamics view from the top as the business stays largely the way it's been running for the last year or so Kevin.

Okay, and then one question I had on.

This will be the last one Kevin.

Okay, sorry. Last question. New product cycle, some of your competitors have talked about new products being launched or being projected to be launched in the future quarter, and that's stealing away from the old product line, I guess, if you were to see that you probably would have seen it in the March quarter based on when your scheduled launches are of the new products, is that fair?

I think that that's absolutely right. I think, once again, I guess, I couldn't put it anymore, we have not located this. We launch new products every year, and you have to be aware of the fact that when you launch new products you may be putting an arrow in the heart of your old products, and so how you do that, how you position pricing on the new products and the old products, and then sometimes you mess it up, but that's largely what we get paid to do and you know, I think you see the result from the first quarter.

Thank you very much.

Vivek Khanna of UBS, you may ask your question.

Phil, I just had one or two housekeeping questions for you. On the tax rate, going forward, can you just update us should we assume that this is the rate that continues, and on the interest income line is that more of a sustainable level? I just wanted those two questions.

Housekeeping's my specialty Vivek. The tax rate, the 24% tax rate is generally sustainable, so I would have you think about our tax rate generally in that range, going forward, for the foreseeable future. With respect to interest, our interest income should grow every quarter with our cash flow. I don't think our outlook for free cash flow over the course of the year has changed much. We've talked about the $150 million or so range for the year that might be a little conservative in fact. So if you anticipate 150 million of free cash flow manifesting itself each quarter, and, you know, use an interest income rate in today's marketplace you'll get pretty close and the interest income should grow.

Then I have a question for Doug. Doug, in terms of the new product launch on the MS side of the business, can you just talk about, you know, you saw some nice acceleration in order growth in the first quarter, and my understanding is that that was launched pretty late in the quarter, so should we see that momentum pickup as we go into second and third quarter, just wondering what you're hearing from the customers in terms of receptivity to the new product?

Sure Vivek. I'd say that what we saw in the first quarter was consistent with the underlying demand that we're seeing for over the last year or two in the Mass Spec area. So, I mean, we've been growing at 38% or 40% in that product line, and that's what we did once again. I think implicit in what we've said is that we see a continuing level of momentum. I'd be reluctant to say what we're going to see is a dramatic layering on, on top of that. Those are pretty heavy growth rates in our product line, and we think we can sustain them, but I think the new products are, certainly; we are displacing some of the older products. We think they are better products and we think we've position them as even better strategically, so we think we are well positioned to sustain that business, but at this point that's where I'd leave you.

Thank you very much and congratulations on a nice quarter.

Donna Takeda of Merrill Lynch, you may ask your question.

Thank-you, and good morning everybody. Well Phil, since you said housekeeping is your specialty, maybe we could just talk about the inventories for a moment. I think you said that inventories were up a little bit mainly because of the new product ramp ups right?

Yes.

Okay, so we'll see that come down then over the course of the year. Your trends have been improving nicely over the last couple of years. Can we expect the same thing this year?

Our trends have been pretty comparable, Donna, they've been improved moderately over the past couple of years from

Moderately or nicely.

From Q3. I think on a full-year basis, our inventories will have a tendency to grow with our sales volume.

Right.

And what we did this year and we've done in prior years is, we've put a lot of that inventory in process and on the shelf in the first quarter to prepare for the year. So over the balance of the year, our inventories were up 10% in the first quarter, for a business that's growing, 12% to 13% secular versus less currency rates. You might see inventories grow a little bit over the balance of the year, I don't think they'll decline, but by the end of the year you'll see an inventory that's grown, kind of, commensurate with sales growth.

Okay, and then following up to that the operating profit margin improvement in the quarter was also, I don't know, if I say good, will you say moderate?

I wouldn't change that.

Could you tell us about some of the factors that contributed to the margin improvement? And we were talking about starting from a fairly good level to begin with.

Yeah, no it's a continuation of all the things we've done and have been doing over the past several years which is, incremental improvements in manufacturing, in the profit profile of new products, in squeezing productivity out of SG&A in an environment where our sales growth rates were pretty fast. Foreign exchange was less of an impact to our operating margins in the first quarter than it will be for Q2 through Q4, during a period of rate changes you can get some delayed impacts of currency, so part of what you see, you've got to be a little bit cautious of this as you project into the future in terms of relative improvement, Donna. In general, we keep staying disciplined across our manufacturing new product and SG&A areas. Also Donna, our operating margins particularly improved because we hit a secular growth rate of 17% in the first quarter. The difference between 17 and a couple of points less generate some pretty good operating margin leverage. So as we guide at 14% to 16% over the balance of the year, if that guidance is more accurate than the 17%, you might not see as much relative improvement versus the prior year, over the balance of the year you'll still see improvement. So that's everything that contributed to the first quarter plus a little bit more.

Okay thanks, and then one fast question. When you said foreseeable future on the tax rate at 24%, did that include next year too?

I think in that range next year, I mean obviously, we are a little far away from next year, but I think in that general range, Donna, I see no significant pressures to that upward.

Okay, terrific, thanks a lot.

Thanks.

Lawrence Keusch of Goldman Sachs you may ask your question.

Hi, good morning.

Good morning Larry.

Phil, a question for you. Tax rate coming down a couple of percentage points from last year and no change in earnings per share guidance for the year, is the right way to think about that just given the tough currency environment that we are in that sort of does that gives you a little extra cushion?

Well I think, the right way to think about it is that currency is the reconciling factor, Larry. I mean, I said I'm comfortable with the 136-guidance for the year. If you left guidance unchanged for Q2 through Q4 that 136 will go up to 138, because we overshot by ¢2 in the first quarter. Any point on the line between 136 and 138, is a rational estimate of what will happen this year. As you look at Q2, Q3, and Q4 not moving much regardless of what point you pick in there from our previous guidance discussion, the reconciling factor is that currencies have gotten worse.

Right. Okay. Perfect. And then the other question Phil, have you done anything yet to recognize this FASB, I guess, ruling on freight and what used to be netted out and now showing up in the P&L, did that have any impact?

No, it had no significant impact, Larry.

Okay. And then last question for you Phil. You mentioned that you had accelerated, it sounded like, some payables, perhaps, to vendors to gain more favorable status. I wonder if you could expand on what exactly that means and does that mean that because the NASDAQ market is growing as rapidly as it is that you are having harder times getting components for those products?

No. What's really happened is we have a challenge in the first quarter, in particular, of producing both our product line preexisting the Pittcon launch of new products and our new products. So, we have in the Mass Spec side of the business in particular, Larry, we used a pretty deep supply chain to do a lot of our manufacturing. As we challenge them with both producing the old and the new, one of the things that we did as partners in a process, was pay a little bit quicker our accounts payable to those vendors, but it was really, it is less with respect to your parts availability and things of that nature as opposed to the particular challenge we are asking them to step up to and it wasn't, it's more of an optic in the quarter than it is anything significant Larry, it's not like payments were accelerated by months, it's just certain payments fell in the first quarter that would have under normal circumstances fallen earlier in the second quarter.

And along with that Phil, because you are asking your partners to perhaps to do a little bit more at this point. Are you seeing pricing change for your components?

No, Larry, I mean, the general environment has stayed the same. In fact, on the fringes, I think parts maybe getting a little bit cheaper with capacity in general freeing up amongst lot of these people who are telecommunication-related supply chain people as well.

Okay. Fantastic. I appreciate it. Thanks very much.

Thanks.

[________________], you may ask your question.

Hi Guys. Great quarter. Congrats again.

Thanks Matt.

Did you experience any kind of pricing pressure in the Triple Quad and in the Q-TOF market, just trying to get a sense of what's going on pricing wise?

Well I'd say we always seek competitors competing on price, Matt. I'd say in the one particular instance that you're probably talking about in the Triple Quad area, yeah, we definitely saw that, in spite of that, we had an outstanding Triple Quad quarter. So, yes, we saw it, but at this point it certainly didn't affect our margins or our penetration into that marketplace to any discernible degree. I think, we are likely to see the same thing, to a lesser extent to be fair, in the Q-TOF area. Again, Matt, there I'd say that's nothing new. We saw that all through last year and continue to see it to the same degree in the first quarter.

Okay. And one other question, on the Thermal analysis side, you had talked about potentially having a pickup with the new products coming out, and I still remember, before you talked or maybe getting that up to a double-digit growth. Is that still possible in light of the economic environment? Or is ..?

We're still looking into that. It is just that's what I agree is a watch out because of the underlying customers, but right now our guys aren't moving off their expectations. We anticipated the first quarter, as I said, to be a staging quarter. And, right now, I'd still phrase it as cautious optimism that we can sustain that plan for the rest of the year. Again that's the smallest piece of our business, but it is probably the one that is susceptible to some of those macroeconomic dynamics.

Okay, thanks very much.

Scott Wilkin of SG Cowen you may ask your question.

Thank-you. Just a follow up on the payables question for Phil, just so I understand it is the difference in the free cash flow number and the 35 million that you quoted almost all that the payables line?

Payables and inventory bill, Scott.

And inventory bill. And then, could you just talk to some of your small BioTech partners, where there any payments to Caprion and [Radiogenics] and could you maybe just flush out, since there's been some concern around this, to what extent, sort of, financing of small BioTech companies may have contributed to the quarter, if at all?

Yeah. As we announced last year, we committed to make a $7.5 million investment in Caprion; $2 million of that was made during the quarter. So, that was funded, but that was an investment. We haven't extended any receivables financing or anything of that nature to any of our customers other than normal trade terms. Caprion purchases from us, purchased from us before the investment, and continues to purchase from us. There's really nothing in the area of vendor financing if that's what you're nibbling at, that's in our results for the first quarter or has ever been in our results.

You've just given your guidance of 14% to 16% organic top line, I mean, lets say small BioTech companies stay depressed or their evaluation stay depressed. Did that really change your guidance at all in your projections?

No, Scott, I mean anything can happen, but in general, when we put out our press release towards the end of March and talked about our comfort with the quarter, and had discussions around that since we could talk broadly, small BioTech is not a huge piece of our business, and we don't have huge multiple installations in our base or in our current numbers with respect to that. So, I think as you look at risk in this world, our business is less characterized by that in the past, in fact, if it happened in the future, it would be upside.

Okay. Thanks. And then just a follow up on the Triple Quad marking. You said you had seen pricing pressure. I guess, taking that a step further, if you had to lower your prices in lockstep to preserve share? And could you also maybe just talk to some of these new product launches that are coming out? And what do you think may happen in terms of share over the next several quarters?

Scott, the basic competitive dynamics in the first quarter, I would say, we're not at a great deal of different from what we saw throughout most of the last year. As they say, you always see price competition in this area. We probably saw our competitors rely more on price last year, as our technical advantages took hold in certain areas. And yeah, we saw that creep up a bit in the first quarter. You can see our gross margin performance. I think from that you can intuit that we haven't done a lot of price reductions anywhere in our product lines. So, I can't say that in any particular instance, we didn't reduce our price in a competitive, that always happens, what I'm saying is that we don't see as a general symptom in our business that we're having to respond extraordinarily to somebody's cutthroat pricing. I'm not saying that that can't happen at some point, but you wouldn't pick a dynamic in our business and point to that as it's going on. As it relates to our new product introductions, I think we're just as confident today as we have been again over the last six months. We introduced the products at Pittcon to customer reactions there and, since, have been outstanding and yet at the same time, we have been able to sell our existing product line and maintain our growth this quarter. So, we think we are into the right transitional phase between old products and new products. As Phil said, we have tried to balance with our supply chain to make sure we have enough leeway to do both. We think we've made the right trade off and we're still optimistic about our ability to make that transition to the new products and do it again with our normal ability to perform on our expectations for the rest of the year.

And just one follow up and then I'll get back in the queue. Just on Mass Spec, you said that the growth was pretty balanced across the different segments. Could you maybe talk, directionally in each of the segments? Did you see any acceleration or deceleration looking at like Proteomics, [________________], and perhaps some of the clinical trial applications? Did some pickup in the quarter do to some..?

I would say on the fringe, Scott, and again, because the strength was pretty universal across these areas and it has been strong. You're kind of searching for needles in a haystack when you pick on one, but I would say, on the fringe, I'd say the [________________] area in drug discovery is probably one of the areas we are encouraged about long term. That's a Triple Quad play and that's a play on both the Quattro Ultima and the Quattro Micro. So, these typically in drug metabolism labs are in drug development as you know, that's been the stronghold of Quattro Ultima performance, but as pharmaceutical companies move a lot of these tests backwards into discovery, [________________] has taken on more importance there, and I think we're optimistic about the long-term role of our products there. I guess, the other area that I'd say, Scott, that I think is largely in the future, although we're seeing some dynamic today is, academic and government laboratories in Proteomics. Lets say, looking backwards, most of that activity certainly in the United States has been in Pharma. We're seeing a fair amount of interest from grant institutions as we look forward over the next 9 to 12 months. So, those are too on the fringe, but again we are operating at a pretty high level as it is.

Okay. Thank-you.

Scott Jones of AG Edwards, you may ask your question.

Thank-you. First on your new product introductions in Mass Spectrometry, would you possibly take a stab at what percentage of your Mass Spec product line was essentially turned over at Pittcon this year?

Turned over is, we'll still be selling some of the older products for a while. I would say in the Triple Quad area, which is the major segment of our business, the Quattro Ultima was not turned over. What we did was enhance that product family with the Quattro Micro. So, that's really a new product that's really aimed at new applications there. The Q-TOF family was again enhanced. I'd say most of the Q-TOF family by the end of this year would be new products sold at the end of the year versus the end of last year. That process will take place over the second, third, and fourth quarter. So, that's significant. The LC Time-of-Fight family remains the same. The magnetic sector family remains the same, and the benchtop, the ZQ, which was introduced last year is a new product for all this year, but was introduced in the third quarter of last year.

Do you have new products in the majority of your Mass Spec lines now?

Yes. Yeah. As I said, I think I just laid out what the new products are. The Q-TOF family is the most significant. There is a major new product in the Triple Quad and there is the residual effect of the new product on the benchtop level arising from the fact that it was introduced later in the third quarter of last year.

Have you heard anything anecdotally from customers about the performance capabilities of new Triple Quad there out by competitors?

We always hear anecdotes, Scott. I'd say it's very early in the process and I'd say nothing reliable whereby any kind of significant number of placements had been made. In this world, most people will cite performance statistics that will optimize for their particular advantages. So, if it's a flow rate or if it's a particular sample, or it's how it operates under certain conditions, you'll hear anecdotes that weight any one of those, as the case may be. Right now, I'd say, as we looked at the last quarter's performance, we didn't see our customers delaying purchases or seen an effect on our Triple Quad businesses.

And finally, just on the topic of protein factories that are being scaled up around the world. Could you take a stab at, maybe what inning we're in as far as those announcements that they are going to be built come along? And also the actual purchase of instrumentation for those facilities?

Well, the term factory can encompass a great deal and then when we look at a Proteomics line it can be a million-to-million and a half dollar opportunity for us in a major university or it could be a $10 million opportunity over multiple laboratories funded by the government of Germany, both of which we would put in this large scale Proteomics category. Talked about that way, we continue to see the same very strong interest manifested in both, early stage discussions, the talking about second half of the next year opportunities, as well as orders that are closing on things that we've been discussing for the last 2 or 3 quarters. I'd say, where we see perhaps a little bit of a pickup or nearer term interest that's come on the horizon is maybe nearer term is in these academic and government laboratories. I think you are seeing with the increase in the NIH funding, you're seeing the grand proposals that were written last year coming to fruition and you're seeing the promise of this application begin to be manifested in real research, being done in that quarter. So, I think that's the dynamic that I've talked about before and I think is marginally new as we go forward in the second half of this year.

Great and one quick one for Phil. Phil, it looks like R&D spending was pretty healthy in the quarter, and I just wondered if going forward there would be any discernible turned up or down in that line item?

R&D spending for the full year should approximate sales growth, Scott, it will be close, it might be a little under, there is a currency impact at the R&D line also. So, as you look at growth rates understand that a significant amount of R&D is done in our Mass Spec operations. So, currency impacts that as well.

Good thing. Thanks guys. Great quarter.

Thanks Scott.

Michael Dauchot of Dresdner RCM, you may ask your question.

Yes. Good morning. Nice quarter. Just a couple of questions, the growth in Mass Spec, I think, when you say 30%, does that mean constant currency or is that post affects?

Constant currency, Mike.

Okay. And I know that you've seen, maybe as high as 40% in the past year, I mean is there some deceleration and what should we expect over the next three quarters, do you think?

As I said, the order growth rates from Mass Spec in the first quarter were closer to the historical revenue growth rates.

Okay.

Again, overall, our company backlog didn't changed, but the mix between Mass Spec and HPLC shipments changed a little bit. The guidance that we've reiterated the 14% to 16% secular growth guidance with all qualifiers for Q2 through Q4, contemplates the world as we discussed in January in which Mass Spec grows in the 25% plus arena and HPLC grows in the double-digit around 10% arena and Thermal analysis starts off low single-digit and approaches hopefully into the double-digit arena. You add that off and that's 14 to 16, and the question always is, gee will Mass Spec really slowdown. I don't know. I hope to be favorably surprised, Mike. I just think it's not appropriately cautious at this point to presume that that 40% or so growth rate continues, but we see nothing in our marketplace that's really changed that helped the demand for our Mass Spec products.

Okay. Great. Anything expected at the ASMS meeting in Chicago, I think in early June?

More or the same I'd say Mike. We hope that once again most of the research papers are going to be siding Q-TOF's as their principal research instrument. You will probably know that's been the case in the last few years. We think that that position of our technology is a key ingredient of what keeps us first in the minds of the research community and we are looking forward to another very successful ASMS.

But its sounds like your major product introductions have already taken place, already at Pittcon?

We showed all of these products. We will be expanding on the performance of these products in real life papers and applications at ASMS, but we don't plan to show any new instruments at ASMS.

Okay. Great. Thank you very much. Nice quarter.

David Zimbalist of Morgan Stanley, you may ask your question.

Hi. Good morning. Couple of questions. First, in terms of an introduction of a new product like, lets just be frank, the API 4000, it's the first new product on that platform that the [API Tax] has had in a while. How long would it take for there to be either delays in customer's taking, which has already been ordered or some sort of transitional slowdown in the market as people want to consider a new product like that from another player? Would you have seen at this point? Or is there something that wouldn't show up for another few weeks to the extent that it's a possibility?

It's not a very easy question David. I think, I can compare it to things that we've seen in the past that in certain of our product lines, Mass Spec being one of them, when a reputable competitor has preannounced or launched a new product, we have seen a dramatic slowdown in our run rate. I mean, that has happened to us and we can trace it directly to a meaningful competitor, throwing up a monkey wrench into the works. In other cases, we have fought through it, and obviously we have been in those positions still as we have tried to secure a position in the marketplace. I think if you look at a reputable competitor who is bringing out a new product, if it does, what they claim it to do in the timeframe then it's going to be a competitive factor. It will be something that we've to address, I think. And as you throw all of these things into the mix of, gee, what is that growth rate now? We have all of these things that appeared to be positive attributes of even accelerating our growth rates. What are the things that we are look at that it could tamper that? And in one hand we have got Quattro Micro, which is a brand new instrument aimed at new applications. We have had a very strong competitive factor in the higher end of the Triple Quad with our Ultima versus the competition. This time, we have got some people coming back at us. We are going to compete very nicely, but it could well be a bit more competition as those things ramp up. I think if you look at the public posturing of those, it doesn't look like they are going to ship in quantity, maybe, until the next calendar year. So, by that time of course our little scientists are working on their own next generation in these fields, so, it's a dynamic situation that I say overall we are pretty confident of our Mass Spectrometry Technology position.

Okay. And just maybe to ask you before we, do you see that when this kind of transition happens to the extent that it shifts market growth in a transition phase, does it happen before the products that are actually available in volume? Or does it only happen once the competitor's products or if you are coming out with a new product? Or when the new product vendor has the product to ship in volume?

Well, what you typically see is that customers can afford to wait and that they believe the new product is going to be significantly better, they will delay orders. So, they can afford to. If you can get a new high-definition television that costs the same as your old television, and it's going to come next week, you are not going to buy the old television this week. If you think, gee, it's not going to come until first quarter of next year and, gee, maybe, who knows about high definition and is it going to be better? All of those things come into play. It's not simply a particular product and how it's been run in somebody's laboratory today. Whether it haven't had broad distribution, you don't know about the service side, you don't know how that customer is feeling today anyway. I'd say all of those things are going to come into play, you might suppose that if customers were really currently responding favorably they would have delayed orders, and that we would have already seen it. We have not seen that, but I am also not going to say we won't see it. I mean, this could well play itself out where we will see a change in order dynamics over the next couple of quarters.

Okay. Thank-you. And second as to your housekeeping-related questions for Phil. Can you talk a little bit about the size of your backlog, is it like more than half a quarter or less than half quarter, or more than a quarters worth? And then finally, can you talk a little bit about your hedging strategy; whatever challenges you've got, given the volatility in the currency market there?

Our backlogs run less than half a quarter typically, it were in the 4 to 6 week range and that's pretty consistent. With respect to hedging, we do some hedging of our net asset positions in foreign currencies and get some favorability in terms of interest dynamics with respect to that. That serves to balance our currency inflow and outflow dynamics a little bit, but we are not active P&L hedges with forwards or options with respect to the general cash flow of the company. Now, under the new accounting [pronounced] since FAS 133, I think the door is opened up to do cash flow hedging where you could walk in the US dollar value of your foreign currency inflows and a bash in where the accounting gets to be a little bit more straightforward, but at today's rates, we are not tempted to try and walk that in and if you use options, options tend to be pretty pricey devices to hedge against risk. So, right now I'd say, we run our business, we look at currency as a cost of doing business. I think the horse is out of barn with respect to currencies for the most part. We cautiously look at the potential of hedging future cash flows, but we are not there yet.

Okay. Thank you very much.

Thanks.

[________________], you may ask your question.

Well, everybody has been asking so many multiple part questions, all of mine have been covered. Thank-you.

Great.

Scott Wilkin of SG Cowen, you may ask your question.

Yeah, just a quick followup question. Just to clarify on HPLC, Doug, you actually mentioned that you trust in strengthening in leads for HPLC in the quarter yet. That's kind of just opposed to your comments that sales grew faster than orders? Maybe could you just clarify that?

Yeah, I think what we saw in HPLC was kind of a continuation of the dynamics that we saw in the second half of last year in terms of our sales and orders dynamics. So, that's within the guidance that we're talking about that Phil has talked about in terms of our top line. We track and monitor all these underlying statistics, obviously to try to make sure that we're not missing something. Some of them can be closely correlated to future business activity, sometimes they're not so closely correlated, and that sales force leads, that the code activity that we're looking at for future quarters. That activity I'd say the some dynamic of that has been marginally up versus previous quarters. So, that's just an encouraging sign. That's, I guess, what I am comfortable with saying, Scott.

Great. And just a followup on R&D spend. If I just, adjust that Phil, for FX, is that sort of a 12% to 13% increase?

It's going to be close to that Scott. That's a fair approximation.

Great. Thanks guys.

You're welcome.

[________________], you may ask your question.

Good morning and satisfactory quarter.

I can't hear you Chris.

Let me ask you, Doug, about the data. Just given your understanding of the factors that led to it being down last year and your cautious optimism about it having a modest recovery this year? Give some qualitative color to what's going into that?

Chris, it's very hard to hear you.

We really can't hear you, Chris.

Can you hear me now?

That's better.

I was just saying just to elaborate on your comments on data, given that it was down last year and expressing some honest optimism that it will have a recovery this year, I was just asking you to elaborate on those comments?

Sure. We, I think on every one of these calls, we talked last year about our disappointment, I guess, I'd say in the level of our data business. This is a product line that's a little less than 10% of our overall Chromatography business, but it's strategically important to us. We think what we saw last year was kind of a day after the previous year's splurge on Y2K investments in our base. We also think we saw a level of confusion in our big pharmaceutical customers on a new regulation called 21 CFR Part 11, which relates to how they have to change their systems to take care of electronic signatures and electronic record keeping. Well, that was a dynamic last year. If we're right, then this year we'll work off that headache. We still think we're in the best strategic position in this product line and that these customers are going to come back and invest in these types of products. Frankly, I hope to see a little bit more of that in the first quarter. That's why I've hedged my optimism a little bit, but we did see more activity on the larger system basis. We do see a fairly dynamic level of leads in quotes and interest on big companies who were interested in even going further on a worldwide basis. So, I'd say that's why I'm cautiously optimistic if its through, but we saw 4 quarters of tough performance here and so that's an important ingredient of why I say, I want to put a couple of quarters of good performance behind me before I'm willing to go out on a [_______________] here.

Doug, you mentioned about shipping some of the new products from Pittcon in volume in the second half? Can you put a little finer precision on which products and which quarters?

Well, almost all of the new products we'll be shipping by the end of the second quarter.

Okay.

In some of our products, have a twist on the Q-TOF family now, it has many siblings since this quarter has little fills in some cases; it's got like 5 or 6 variations. One of those variations may not ship in the second quarter; it may go over to the third quarter. So, I don't think it's a huge dynamic, but it will be the case that we're not likely to ship one of those variations before the summer.

And a final question, given all the expenses discussion about new products and how that's influencing the marketplace. Comment on what you're seeing from your introduction from Finnegan and the Triple Quad?

Yeah, I think we've seen 2 companies, one introduced at Pittcon in, kind of, the normal course of events, and you go through the normal competitive evaluation and look at that, and the other, our competitor introduced very late in the quarter and there aren't a lot, you don't have the normal show at Pittcon and look at the chromatograms and what have you to get as good an evaluation. I would say, there are going to 2 competitive factors in the marketplace. Certainly, in the one case they always have been. In the case of Finnegan, they were out of the Triple Quad marketplace essentially for a long time. Now, they are back in it with a product. Obviously, in the first quarter, they were promoting that product line. I'd say, you can see our performance in the phase of that. You can interpret for yourself whether that has a significant dynamic on us. It certainly could creep into a greater degree in the future, but at all as what can they show in competitive trials? What are the other factors concerning service? And how do you reacquire your position in Drug Metabolism Labs if you haven't been there aggressively in the past? How strong is your sales force? All of those factors weigh in as well as having the actual product. I'd just say from that perspective, our first quarter in the phase of those dynamics was very strong. I would not discount the fact that the future is going to be more competitive though.

Thank-you.

Once again to ask a question please press * 1. At this time Sir, there are no further questions.

Okay, well, thank you all once again for being with us and we'll look forward to talking to you all again in the summer. Thank-you. Bye-bye.