Waters Corp (WAT) 2002 Q1 法說會逐字稿

Good morning and welcome to the Waters Corporation conference call. All participants will be able to listen only until the question and answer portion of the conference call. On request of Waters Corporation today's conference is being tape-recorded. If anyone has any objections, they may disconnect at this time. I would now like to introduce your host, Mr. Douglas A. Berthiaume, Chairman and Chief Executive Officer for Waters Corporation. Sir, you may begin.

Thank you. Good morning and welcome to the Waters Corporation first quarter of 2002 conference call. With me on this call this morning is JOHN ORNELL, the Company's President and Chief Operating Officer, John Ornell, the CFO, and Brian K. Mazar, the Senior Vice President and Director of investor relations. As is our normal practice, I will cover the first quarter results and then John Ornell will take you through the financial details and our 2002 financial guidance, and then we will open it up for Q&A. Before I begin, I would like to ask John to cover the Safe Harbor. John?

Yes. Good morning. During the course of this conference call we may make various forward-looking statements regarding future events or future financial performance of the company. In particular, we will provide guidance regarding possible future income statement results of the company, this time for 2002 second quarter and full year. We caution you that all such statements are only predictions and that actual events and results may differ materially. For a detailed discussion of some of the risks and contingencies that can cause our actual performance to differ significantly from our present expectations, see our 10-K annual report for the fiscal year ended December 31, 2001, in Part One under the caption Business Risk Factors. We further caution you that the company does not obligate or commit itself by providing its guidance to update predictions. We do not plan to update predictions regarding possible future income statement results, except during our regularly scheduled quarterly earnings release conference calls and webcasts. The next earnings release call and webcast is currently planned for July 2002. Doug?

Thank you John. The first quarter of 2002 is one we are glad is now behind us. Although it is not a quarter we will look back on fondly, we are cautiously optimistic that the worst is now behind us, and that we should see business improve from these depressed levels as we go through the rest of 2002. As I am sure most of you know, the significant event of the quarter was the jury finding in the triple quad lawsuit that went against us in March, and that prompted the late March press release and conference call where we revised our first quarter and full year 2002 estimates. Measured against that late March update our earnings before patent litigation charge came in within the range of our expectations, while our sales review came in $4-5 million lower than those expectations. John Ornell will discuss in more detail the first quarter patent litigation charge. But sales were lower than expected for the quarter, principally because of large mass spectrometry systems that we originally anticipated would be installed and started up in the first quarter, and that were delayed into the second quarter. We also saw some slowing of incoming orders, primarily from large pharmaceutical customers, and once again primarily for mass spectometry products, although it was a more widespread dynamic that that. These dynamics produced mass spectrometry revenues that were slightly down in the first quarter. As a result, we have adjusted our full year forecast downward somewhat. John Ornell will take you through that forecast a little bit later on. In the March conference, we detailed that for our high-end Q-Tof product lines we had stopped shipments in the United States until the instruments could be reengineered around the jury's decision, and that we anticipate shipping Q-Tof into the United States sometimes in the second half of 2002. I am pleased to report that that process has proceeded faster than originally anticipated. In fact, we have already started shipping Q-Tof Ultimas to the US during the second quarter. Q-Tof Globals and [______] have not begun shipping. We have just begun shipping the electrospray version. But we do intend on shipping Globals and [______] during the second half of this year. In the triple quad products family, we continue to emphasize the Quattro Micro, and we continue to see a good response from the market for this product line. We continue to work hard on a Quattro Ultima replacement. This is the high-end triple quad that was the primary subject of that lawsuit. We would forecast and continue to forecast at 2003 introduction of a Quattro Ultima replacement, although there is some chance of a late 2002 date. Overall, we are pleased by our organization's rapid response to these issues and by customers' clear desires to work together with us to arrive at mutually acceptable solutions. In our HPLC business we finished the quarter a little lower than our original expectations with mid single digit growth. In HPLC we saw a split along geographic lines, with good strong double-digit growth internationally and slow business in North America with actually revenues down a little bit in North America. We saw our business in large pharmaceutical companies in the US be particularly slow. Because the 2001 base period for the US was particularly strong, we believe that easier comparisons for later quarters in 2002 will produce somewhat improved growth rates. Our market intelligence implies that big pharmaceutical companies' budgets are delayed and not reduced. However, we are being appropriately cautious for the remainder of 2002. Looking at some of the other bellwethers of the HPLC business, our consumables chemistry products did very well, growing in the low double digits. Large network dairy products also did well, growing in the mid-teens. This is particularly of note, because our lead list here is also strong, and this product line is heavily weighted to big pharmaceutical accounts. So, clearly we saw pharmaceutical spending stay reasonably good in this strategic area. We also continue to see good response to our bench-top LCMS, and particularly our mass directed purification, and also UV directed purification products that were introduced last year. In summary, for HPLC we are feeling okay about the rest of the year. We believe we will continue to be led here by our international business, which should remain strong, and we believe that US will get better, albeit at a relatively slow phase. Our TA instruments business continues to operate in a very slow market environment. Sales were flat in the first quarter, just about where we expected. We expect that in the rest of 2002 we will see sales growth in the low to mid single digit area. On the strategic front, several actions completed in the first quarter; the cast dispersement for the gene product investment for $10 million that we announced last year was finalized. We continue to anticipate by the way shipping and recognizing revenue from gene product, proximately breaks down $8 million in the second quarter and $8-9 million in the third quarter this year. We also completed the buyout of our former Irish distributor in the quarter for approximately $6 million. We now have full direct sales in this fast-growing segment of Europe. We easily funded our strategic investments from another strong free cash flow quarter. Integrated, it was $39 million, almost tripled 2001's first quarter. While 2001 was a relatively low quarter, we are still off to an impressive start, I think, with good working capital management being displayed. In summary, the first part of our 2002 has been dominated by the effects of the triple quad litigation. But as we begin to get our arms around all the ramifications to our business, it looks to us as if we can meet or marginally beat our original timeframes for returning to the market in the affected product areas. In addition to this dynamic we clearly saw a lower level of orders than planned from large pharmaceutical companies during the first quarter of 2002. For HPLC this was largely a US phenomenon. For micro mass it was both US and Europe, although the lawsuit dynamic clearly muddies the US interpretation. Our expectation, and what current market intelligence supports, is that big pharmaceutical budgets are delayed, not substantially reduced for 2002. Our outlook anticipates that this market begins to improve in the second half, but does not recoup totally from current low run rates. At this point, I would like to turn and over to John Ornell for the financial details.

Thank you Doug. As Doug said, we are glad that this quarter is behind us. Sales grew by 2% over Q1 2001 for currency effects, and we are flat at actual foreign exchange rates. Earnings per diluted share were $0.29 for the quarter before a provision to the final tail of the patent's litigation costs, representing a 4% decline over Q1 2001. After the patent litigation provision, earnings per diluted share were down 7%. The Q1 patents litigation provision relates to the triple quadrupole product suit, and reflects estimated costs incurred from the start of the year through March 19, 2001, the date of the jury verdict, which could not be accrued for in the $75 million yearend provision. We estimate that as of this point we have covered all currently known present and future expenses relating to this litigation other than potential post-judgment interest. The revenue shortfall versus beginning of year expectations was principally due to an unfavorable ruling in the triple quadrupole patent litigation case that resulted in $9 million of reduced sales within the United States. Other factors contributed to the slowdown including several million dollars in reduced sales from weakened unexpected demand from large pharmaceutical customers, several million dollars associated with shipments with delayed customer installations where revenue recognition was deferred, and a couple of million dollars relating to unfavorable foreign exchange effects. Sales growth by product line and before currency impacts was as follows: the HPLC business performed slightly less than expected. Sales grew in the mid single digits for the quarter. Sales were soft in the US and strong internationally. From our analysis, business was flat with last year's versus an expectation of growth in the low single digits. Mass spectrometry sales were a significant disappointment as a result of the fact as I described earlier, which largely impacted this product firmly. Mass spectrometry sales declined slightly in the quarter versus our high-teens expectation at the start of the year. Earnings for the quarter declined slightly on flat sales, growth margin improved, and our effective tax rate declined slightly from 24% to 23%. Expenses rose a modest 5% over prior year levels, though obviously faster than sales growth in the quarter. Within this overall performance, foreign currencies cost the company roughly $0.01-0.02 per share for the quarter versus Q1 last year. Our balance sheet remains strong as of March 31, 2001, with the benefit of free cash flow of $39 million in Q1. In addition to the strategic investments Doug mentioned, we made a few other small technology related investments for approximately a few million dollars in the quarter. Inventories increased modestly during the quarter, as historically is the case for the start of the year. We anticipate that we will see temporary bills in inventories over the course of the year as we work our way out of the challenges impacting the micro mass and mass spec business. This bill should be worked off by year's end. Counts receivable day sales outstanding stood at 76 days, which is comparable to Q1 2001. We are happy with this performance, and anticipate maintaining this collections performance in Q2 and Q3, and we expect Q4 to bring its typical seasonal reduction in DSO. As we look towards our prospects for the remainder of 2002, we are confident in our ability to reengineer mass spectrometry products around existing patents and resume volume Q-Tof sales in the US later this year. Current [______] in the market place principally with large pharmaceutical customers is concerning, and while we expect a turnaround its exact timing is difficult to predict. With this backdrop, our guidance for sales growth before unfavorable currency impacts is 7-8% for the full year. At today's currency levels, we would expect the currency to be unfavorable, and would likely deduct two points from sales growth for 2002 full year. Our outlook for earnings given the sales volume is $1.35-$1.40 per diluted share of 2002. Regarding Q2 2002 we estimate sales growth to be 6-7% before unfavorable currency of 2%. Given the sales growth and plans to delay new spending, earnings are estimated at $0.31 per diluted share with the normal $0.01-$0.02 tolerance for the quarter.

Thank you John.

Thank you. At this time we are ready to begin the question and answer session. If you would like to ask your question, please press * 1 on your touchtone phone. You will be announced prior to asking your question. To withdraw your question, press * 2. Once again, to ask a question press * 1 on your touchtone phone. Our first question comes from Ronald C. Renaud of Bear Stearns. You may ask your question.

Good morning John. Thanks for taking my call. You had mentioned that all presently known expenses related to the litigation were included. Does this also include the damages of $47.5 million that we heard about a little bit earlier on?

Certainly the $47.5 million is fully covered in the existing liability that we showing both at the end of December 31, 2001 and currently at the end of March. So, yes, that is 100% covered as we speak.

Okay. My next question would be, what are the chances that this gets overturned or PL'd ? When can we expect at least positive upside going forward? What is the case scenario?

It is difficult for us to make that predication certainly. From an accounting perspective we have obviously taken a decision that is conservative on that front. We feel we have a very strong case as we look at moving beyond this judgment and into a new process. We are going to fight vigorously obviously in that stage, but I do not know at this point if we really want to come forward and make a guesstimate to call that.

Thank you.

Our next question comes from Carissa Marino of Goldman Sachs.

Thank you. Could you please provide some color on the delayed pharmacy spending, and I guess specifically what you are hearing from customers as to what is driving this?

Yeah. I think it is not a kind of peanut buttery. I think we are seeing a clear dynamic in our US business as opposed to our European business, and also our Japanese business. That is very clear for HPLC, where the large pharmaceutical accounts in Europe did dine this quarter but in the US it was very slow. Now, all of these US pharma companies are international pharma, and they have subsidiaries overseas. So it is a little bit dicey to draw a total worldwide conclusion here. But I would say that we believe that the US pharma dynamic is particularly slow. Micro mass' European business also came in slower than we anticipated. We do not think that that is related to any fallout from the lawsuit. The products are totally available in Europe, but we saw the generalizable dynamics in Europe that looks very much like delayed spending. We have looked at all of those orders that were anticipated to be received. We didn't lose them to specific competitors. So the significant amount of those is still being worked, but it isn't pushed out in the year. Of course, there is a lot of news in the general press about the difficulties that a number of big pharma companies are experiencing. When you talk to the accounts themselves you hear some reinforcement of that dynamic, but I cant say that it is anything that you would say is a clear consistent message across account by account. Some accounts would tell you that this exactly what they experienced last year, that budgets are getting approved a little bit later in the years. It is true that last year in our HPLC business our big pharma accounts were skewed towards the end of the year. They did get their budgets approved a little bit later in the year last year also. It is a more pronounced dynamic, I would say, this year.

_____]: Okay, great. That's helpful. Could you also elaborate on the mass spec installation delays? Are these somewhere to what you experienced over the last two quarters or is there another dynamic going on there?

I don't think there is anything; other than the fact that it is a bit larger, if you will. There is nothing different with regards to the installation themselves, same type of equipment if you like, same customer base. It has just extended out longer than we had anticipated at the end of the first quarter.

It is needles to say, we have always been and we continue to be very fastidious about meeting the requirements for revenue recognition. Therefore we go through all of these quarters and shipments line item by line item to make sure that any customer requirements have been signed offline. In the last year or two that process has probably got a bit more stringent or administrative than it has been in years before. Again we don't think that this is related to customers wanting to delay for financial concerns. This is just a situation where the instruments may have showed up at the customer's site, but the customer's laboratory wasn't totally ready to have it installed, and therefore its going to be installed two or three weeks later. That was just a bit bigger dynamic than we would have hoped in this quarter.

_____]: Okay, great. Then one final question; could you provide the breakout of free cash flow?

Cap ex for the quarter was about $8 million.

Cash flow from operations was about $47 million or something like that.

_____]: Great. Thank you.

Our next question comes from Donna Takeda, Merrill Lynch.

Thank you. Good morning everybody.

Good morning Donna.

Doug, could we talk a little bit more about the HPLC slowness, particularly in the US. Is it your sense that the customers have just slowed down? Were there any competitive issues that might have come up during the quarter, or also some of these delayed installations that you experienced, although I know that the setup on these is a lot easier than the mass spec?

There were no installation issues on the HPLC side of our business. Actually, I probably feel more confident about the HPLC business than the raw numbers would lead you to believe right now. I, in fact, think we are doing just fine competitively. I do think that what we are seeing early on is a little bit like what we saw last year. Its more pronounced, but it is not a dynamic that we haven't seen before. You recall that last year I talked about HPLC, big pharma, being flat to down from the first three quarters and then came roaring back in the fourth quarter in the United States. I think we are seeing that same kind of dynamic here. The HPLC business is a very strong international business right now. I have talked to a number of the international people just recently, and they are pretty confident of the sustainability of that. I think we are going to see this business pick up as we go on from here.

Okay. Shifting gears for a second; back to the incremental expenses this quarter for the litigation, were these all just [_____]? Do I understand what you said?

Yes, Donna. This charge relates to expenses that were incurred post 12/31 in the first quarter that technically couldn't be accrued therefore in the $75 million year-end provision; things like prejudgement interest. We had some true up of reserves related to actual Q1 sales, and a few other minor items that from a very technical accounting perspective needed to be Q1 expenses and couldn't be incorporated in the $75 million charge.

Are there any of those for the second quarter?

No. These are expenses principally that bring us from the start of the year through the March 19th judgment date. The only potential expenses from this point forward would be post-judgment interest on the 4705, to the extent that the judge determines that that will be needed, and that is something that cannot be accrued.

Is there anything you could say at this point about the post-trial activity?

Not really Donna. All of the motions; they are probably 5 or 6 different motions that are now with the court. The only thing I think we can say is that we would expect answers to all of those during the month of May. We may get somethings answered earlier, but by the end of May all issues in front of the court should be dealt with.

Okay. One last thing, just going back to the cap ex; $8 million in the first quarter, would you say the number is for the full year? Anything big in there that is to be notable?

No. I think it's a relatively normal year. We were in the kind of 35-38 range perhaps, which is think is very consistent with history, maybe a little less than last year because of building expenses and the like we don't repeat, but I think we will be in that 35-38 range.

Great. Thank you.

You are welcome.

Our next question comes from Ken Goldman from Lehman Brothers.

Good morning. Were there any specific reasons for the delay in installation of the units you mentioned?

No, we don't think anything generic. It was a little bit higher than anticipated. It was not product related. I think the general theme was probably customer related, laboratories not quite ready for the final installation. The laboratories had to get some of their gas supplies in and things like that. It was not much more than that. These are $0.5 million shipments. So this is kind of a handful of installations.

Okay. Just one other thing on the litigation front; getting waver from the judgments, has there been any activity to negotiate a licensing fee or anything like that?

I think you can assume that the management has explored all available remedies to this situation. If and when we have anything to report we certainly will.

Okay. Thanks very much.

Our next question comes from David Zimbalist from Morgan Stanley.

Hi. I have just two issues. Could you talk a little bit about [_____] in the quarters? Are those areas proving strong, particularly in HPLC as well as mass spec? Secondly, if you could just talk about modifications of the [_____] Irish subsidiary for your top line multiple gross profit margins.

You are breaking up a little bit there David, but I think we got the gist of that. In general, the academics and government segment of our business was pretty strong as was the biotech segment. The only noticeable piece that I think is worth commenting on of our traditional stronger piece was that the big pharma piece was softer. On the Irish distributor, this business has always run through our sales. I don't think that the actual revenue dynamics were significant vis a vis first quarter of 2002 versus 2001. So we have been making sales to these customers. We just were doing it through a distributor last year and we are doing it through a direct organization this year. We did this because of course we want to control our business in all important areas. While we are direct in almost everywhere, there are a few legacy areas in our world that were old-line distributors who worked with us for years and years. In a couple of those cases, you remember we bought out [_____] a few years ago. Ireland was one of the last of the old-line distributors, good guy who had worked with the years. The time came for him to retire and we just had been waiting to move in there. So that was the situation in Ireland.

But it didn't have any direct effect on your [_____].

On gross margins?

Do you have a distributor margin?

Certainly the margins going direct would be a bit better, but just given the volume of business that we do in Ireland versus the overall business if it nicked at the end of the day.

Of course, we are now paying for the direct sales versus the distributor who is funding those operating costs. I frankly don't know up-hand, but John can get you the specifics at some point David. It is not a big dynamic.

Great. Thank you very much.

DAVE WITSKY]: Dave Witsky here with [Merav ] and [_____]. I guess we are all joining on questions. We are obviously happy to hear that the new CSI Q-Tof has begun shipping. Can you discuss the lead time between first customer contact and sample testing and the shipping installation and recognition of revenues?

Dave, the recognition of revenue part of your question, I guess, doesn't change with regard what we have just begun to do. In other words we have begun to make customer shipments of the electric spray Q-Tof systems. That basically, in some cases we are filling backlog orders that we had. Now I am not sure I understood the first part of your question actually.

David, are you inquiring about the general cycle from first point of contact to when revenue was recognized?

_____]: What we are trying to figure out is whether the fact that you are now supplying customers a slightly different machine. Would it require you to retest their samples, re-buy their samples, and for them to reconfirm their orders? Or are the customers saying, just give me what you can give me? So we are wondering whether the fact that there is now a slight alteration in what you are selling them? Does this stretch out the time line?

What we are doing basically is in only one part of the Q-Tof Ultima, and it goes back to an earlier configuration when we had something called the Q-Tof 2. We were able to explain to customers sort of what the differences are, and there are some small differences. So far what we have found is that people understand the overall performance of this system and not just to say that they are okay. It wont change the time dynamic in terms of a new order coming in, for instance. In many cases we still will run customers that want to show the performance that they want. But since the Q-Tof applications are largely a function of accurate mass, high resolution, and a lot of other things like the software of mass spec. We don't think its going to change the selling dynamics very much in a going-forward basis.

We have looked at the orders that were in backlog of the API orders. I would say that most of those have gone to the new configuration without requiring substantial rerunning of samples. Of course, we do warrant that they will get a certain level of performance, but we are reasonably confident about the system's ability to deliver that.

We are delivering within the specimen case end of the system now.

_____]: Okay. Another question relating to HPLC. Items to single HPLC are somewhat driving consumable business versus the capital equipment side. So the whole idea is like pushing back on HPLC purchases or seasonality sums. It is a little bit strange to me unless you have people playing with budget-side, that is they are buying a large chunk before EOS to finish their budget, and then the first quarter suffered as a result. That's why you have this year-end of a stronger second half pattern. I was wondering whether you think that was the possibility or whether there are different dynamics to the HPLC business.

Well, you cant ever say that there aren't some individual sales or purchasing dynamics that go on. As you allude to, you wind up with strong fourth quarters and weak first quarters and you search for reasons. People will say, "Gee, some people bought a little ahead of the curve or slowed it down". I frankly think that in our HPLC business, while I understand you allusion to being a consumables kind of thing, don't forget that our HPLC business includes LC mass spec. It includes big data. We are often times talking about relatively large procurements that have to be kicked off. The big pharmaceutical company may be talking about buying $5 million of LC products over a point of the year from the point that they begin. Sometimes before they start releasing that stream of products they look at that $5 million versus just a $40,000 instrument. That is one element of that. You know, from some of the larger, more notable US farmers, as we look through what happened, we think that some of that has happened, that they have just pushed off the launch of some their larger capital procurement programs. Again, none of them talked today about overall reductions in their full-year capital plans. But I don't think we can totally take that to the bank.

_____]: We are hearing across the industry commentary about major slowdown at Bristol. I don't know if you are seeing it. The question is, its not necessarily clear what is happening there.

I think that's right. I would agree. I hear similar kinds of things. But again, you hear from director level people, you hear from laboratory people. You try to look for confirming evidence. You roll over those factors together. Obviously you look at their financial performance and their public pronouncements. Sometimes I am on the side that I don't see these slowdowns. This time I think we are seeing it. I don't think it is necessarily a dynamic that will continue forever, but I think we are experiencing it now.

_____]: Well, thank you very much for your time.

Thanks.

Our next question comes from Scott Jones from A.G. Edwards.

Good morning. A couple of questions; first one is, Doug you talked about data orders in HPLC for the past few quarters. I was wondering if you could just provide some color there. Second question is on the install delays. Were any of those related to HPLC or was that solely mass spec?

The installations were all related to mass spec., and large mass spec orders, and scattered around the world. It was not one big massive order. It was a handful of orders spread around. I think in my comment I talked about our large network data business was up in the mid-teens. Frankly, that's a little bit slower than it was in the third and fourth quarters of last year when it was up higher than that. But I still think that it shows in that important strategic areas these companies are beginning to work their way through some of the issues that caused them to defer that spending year and a half ago. We are pretty optimistic about the outlook for big data out the rest of this year. While that is a little bit lower than we had anticipated it is still not a bad start in this environment.

Actually one more. Are you currently going through a scale-up process for the ESI comp triple quadrupole Ultima? Were those shipping sort of at the rate of demand? If you are going through a scale-up process, how long would you expect that to take?

You mean the Q-Tof?

Yes, the Q-Tof Ultima. I am sorry.

We are basically whipping production back up around the configurations that we have just begun to ship. So as John said in his comments, we expect to fairly rational second half ability to ship Q-Tof.

We have started shipping, but just started shipping now. We will be ramping up. We probably expect us to get to full production probably at the beginning of the third quarter.

Great. Thank you.

Our next question comes from Sherry Walker from Deutsch Bank.

Good morning. Something you could give us some color on what's happening in the first two weeks of second quarter; are you still seeing that soft demand from pharma? Is there any uptake?

Well, I am always in danger of talking about two-week data, particularly when it is the first two weeks of the quarter Sherry. I would say that, I guess the first part of this quarter is consistent with the outlook that John laid out for our expectations. That's about it. We see some pieces of good news in there. We don't see any extraordinary bad news, but it's only a couple of weeks. So I don't want to give you the impression that you can take too much of that to the bank.

Sure. Can you give us some more detail on the timeline with getting the re-engineered Q-Tof Ultima to the market?

Well, I think, Sherry, as Doug said, there are probably two things that are important here. One, we do need to get kind of complete resolution of all these motions in front of the court, which is going to take us probably at the latest till the end of May. That basically deals with all issues, but it also deals with the very detailed technical specifics of what is actually being ruled. That's a significant determinant in several different options that we can play. Doug alluded to the fact that there might be something we could do later this year. I think we could be able to make that decision once all the court rulings are through. If we took everything purely the way we see it now, we think by the beginning of the next year in the first quarter we would be in position to have sort of our next cut at this. So it is somewhere between the fourth quarter and the first quarter next quarter. We wont be able to make that call until we get sort of the final language out of the quarter.

Great. In terms of the $9 million hit in revenue to the first quarter, are there any estimates on what that might be in the second quarter?

For the second quarter our plan is to have a very similar impact to the first. Then we will have improvement in the second half.

Great. Thank you.

Our next question comes from Scott Wilkin from SG Coven.

Thank you. John or Doug, we are just wondering if you could give us some guidance as far as the specific segments in light of some of the pharma issue slowdown. If you could take us down as to where you see HPLC and mass spec doing for the year.

Sure, Scott. I think John can lay that out.

Yes, thanks Scott. I think as we look at the full year, we are looking at HPLC being in high single digits. I would say it would be our best guess as to where that looks like it is coming out. Regarding the mass spec business, as we average across the year I would say the full year's result would be high single digit growth as well. TA, not anticipating a lot of improvement there. So flat to low single digit growth, I would say, would be our full year best guess at this stage.

Okay. In light of the slowdown could you maybe review your assumptions on recovery in pharma? What have you built in to this guidance relative to that, and what's the tolerance here around this?

As you particularly look at the mass spectrometry piece, where the most dynamic element of this pharma spending I think was felt, we're anticipating a marginal improvement in the second half of the year. Clearly, one of the elements that enter into this picture is that when we laid down our initial guidance we didn't fully bake in the things like our gene [price] revenue into the original expectations. So as we look at our ability to optimize revenues for this year we're able to offset some of the downside with things like gene [price] and that's entered into this equation. Otherwise the revenue would be lower-growth than John just laid out. So we're anticipating that the second quarter pharma doesn't get any worse than it is in the first quarter, but perhaps just a little bit better in the US - don't think that there's a huge amount of risk - in the second half further marginal improvement during the third quarter and picking up a little bit more in the fourth quarter.

That's relative to both, but it's most significant I'd say in the mass spectrometry business.

_____]: On HPLC, are you assuming any modest improvement there or is it more of the same?

I'd say we're assuming the same industry dynamics will affect both, but the marginal impact on the HPLC business is smaller than it is our assumptions on mass spectrometry.

_____]: Okay. And just to clarify: the $2 million that were delayed, you didn't break that out.

I'm sorry?

_____]: $2 million in orders were actually orders, those were delayed. How did that break down? JOHN [NELSON]: We said several million, we didn't say 2. In any case, the delay in the orders was truly on the mass spect side. We saw with pharma a preponderance of issues surrounded by high-ticket items and micro-mass was heavily impacted.

Our next question comes from David Molowa from J.P. Morgan.

Just a followup to the triple quad question. The product that you could introduce towards the end of this year-beginning of next year, is that a re-engineering around the patent situation or is that an entire new platform? And how does this system stack up regarding sensitivity with the [ADI] 4000?

_____]: The product that we will introduce towards the end of the year, should we choose to do so, involves a relatively small change to the product we were about to introduce at the Pittsburgh conference. The new high-end triple which is introduced in Europe, the platinum...what we're talking about as a possibility in the fourth quarter is modifications to that product. If we find that we don't want to do that and we have to go into the beginning of next year, I think what you're going to find is it's still going to be modifications to the platform that we've already launched; it'll just be a different type of modification that we would make, again depending upon the semantics. So in neither case are we starting from the ground up, it's really we've different options we can entertain and we feel pretty good that we can get back to the position we were at before, but it's a question of approach - what approach we need to take. So that's all we can say about that.

We think it will be a competitive triple-quadruple, David. As we've always said, you compete in this area on a number of factors and everybody tries to run the samples that most optimize their particular performance specs. I think what's fair to say is that it'll be substantially better than the old Quatro Ultima, but where it would spec up one-on-one in a sales situation would remain to play itself out.

Thank you.

Our next question comes from John [Fischer] from [_____] Bank.

I had two questions. One: when you broke down the revenue miss or reduction you referred to several million for revenue deferrals and several million in reduction in large pharma spending impact. Just wondering if you could quantify that or, if not a specific number, what its range is. Two: Just wondering if any customer or customers explicitly canceled business with you in regards to the patent laws to [ADI], if you could enumerate that in the quarter...

I think we're comfortable with how we described our overall business at this point and I don't think we want to give too much more detail. The second part of the business was on lost business? I'm sorry I didn't hear that...

Yes, I was just wondering if any customer has had explicitly sad...in regards to the court decision...and explicitly cancel any orders or cancel business with you, or if things are still in discussion and all pending orders are still open to substitute products as [redesigned] by Waters [_____]?

I would say we're still working all of those customers. As far as we know no one has placed competitive orders, although I can't guarantee that. I can say that I know that greater than 50% of the backlog has accepted the new product and we're working the rest of them. It wouldn't surprise me if one or two of them had said, 'No, I don't want that,' and I'm going to determine what my response is going to be. But I'm not aware of anybody who has placed a competitive order at this point.

Okay, thank you.

Our next question comes from Thomas Flaten from RBC Capital Markets.

Thanks. A couple of quick questions. One, could you comment maybe a little bit on how the international uptake of the Quatro Ultima Platinum product has gone so far since you began shipping that?

I'd say that we really introduced that at the European Trade Show in April - end of March or early part of April. So that really has only hit the European just now. John, I don't know if we have any... JOHN [_____]: We didn't go through the introduction here in the US. There were some significant changes in some of the inlet [_____], particularly in chemical ionization and so forth. That's an application slice that's somewhat less in terms of total market, but the improvement was quite significant. That's just now going through kind of a demonstration cycle and introduction cycle. So it's a little early for us to comment on how it's doing, but I would say that it has a lot of positive future to it and we're off and running and certainly by the next call we'll have a better [_____].

Fair enough. I hate to go back to this again, but John [Arnell], you mentioned several million dollars in lost pharma orders, several million dollars in delayed installations; just to clarify some of the comments you made since then: all of the product delays - not from pharma but just on an installation basis - were MS-related?

Yes, that's correct.

And then on the delays from pharma I have two pictures from you; one is that most of the pharma delays were in HPLC and I heard the majority of it was in mass spect. Could you just clarify that? Just a word, to be absolutely sure of what's going on in pharma here?

Absolutely. With regard to the pharma delays, the majority of those delays are related to the mass spect business, so you got that as [_____] described it. The installation delays were solely related to the micro-mass business. We did talk about some pharmaceutical slowdown principally in the US on the HPLC side, but again the big factor was turly on the mass spect side with regards to loss of demand.

So if you take a look at the 1-2 percentage points that you drop your growth rate expectations for the year, that is principally driven by mass spect, about 75% of that by mass spect?

That's correct.

Okay. And when you did your March 25 call, there were a number of questions regarding your outlook for pharma. Had this not become apparent at that point, or did you just not want to muddy the waters with the macro spending outlook with litigation out there?

Certainly, with the March call the focus was on the litigation and where we stood there. When we talked about the litigation impact and we looked at the overall market place, when you looked at our guidance there was a little bit of gap that was unexplained. We were looking at some proposed pharmaceutical demand shortfall. There is a relatively large hockey stick in this business; we were somewhat hopeful that what we'll see in the last week of the quarter, it wasn't and thus the overall shortfall that took place in the first quarter that we're now describing in some detail.

And one last question, if I could. Could you comment on the various product lines within your mass spect business, how those grew relative to last quarter...or last year, I should say?

If you look at Q1 sales, we're looking at the Q-Tof up somewhat, mid-singles if you will, and we're looking at the triple quads down slightly, and the last third being rather [lumpy]...a pretty poor quarter. That's roughly the product line.

And when you said the Q-Tof were up mid-singles, is that on a "pro forma" basis if you exclude some of the $9 million...?

No, no, not at all. That's including that pane.

That's a real number?

Yes.

So your best guess at a pro forma Q-Tof growth rate? Is it possible for you to do that or...?

I could do that, but I wouldn't want to do that off my head. We could probably talk about that separately.

Fair enough, thanks.

Our next question comes from David Zimbalist from Morgan Stanley.

If you could further clarify if you have a sense as to what your normal last-week-of-March orders, or sales are, as a percentage of the total quarter? Just that it's fairly important month given the [PittCon] in the quarter? Second, if you could help us understand a little bit if the mass spect sales folks have their quarterly quotas based on a different calculation of revenues versus the new gap earnings and if that perhaps is leading to some of the issues with delayed revenue recognition for installations...

In terms of what drives the sales force, David...what we drive the sales force is book orders. And they have a clear rule book as to what orders are and how far [_____] take an order for delivery six months in advance. We drive them to book every order that's out there, and then it's the administrative functions in the organization to make sure that we forecast and control the delivery of those products to meet our revenue recognition assumptions. So it's not anything that's happened in the process that's driven this; it's just that something we thought - and didn't just think, we had scheduled - for installation slipped, and in most cases they slipped a couple of weeks. So I don't think what we're seeing here is the dynamic of the sales force doing something different in light of the revenue recognition. The other thing is this year - and I think it's of some note - the Pittsburgh conference was two to three weeks later than it normally is; it can be as early as the last week of February and normally is the first week of March, and it was March 16, 17, and 18 this year. So that had an [effect] of moving almost two weeks later in the process things that were more normally spread out over a three- or four-week period. Clearly the first quarter, because of the [PittCon] dynamic, has more of a hockey stick to it from the order generation [standpoint] than almost any other quarter, and this year it was unusually so because of the late date of the [PittCon].

Do you notice, looking at those particular accounts where you have installation delays or installations that were pushed out a bit, if the budget concerns or delays at those accounts - these are former accounts - are contributing to their readiness to accept delivery? And if that is into your thoughts on what rate the recovery might actually...

We're talking about a handful of installations here; none of those related to budgetary issues. We have the logistics in place, and in all of those cases, as I said, it's going to happen in the second quarter. We have no indication that this is financially driven.

One last question. The gene [prog] numbers that you gave are a couple of million dollars lighter than the initial order. Did that have to do with the Q-Tof Ultima components or is that still a possibility?

The overall contract was higher, as we indicated before, because it contained a deferred service component that will be recognized over multiple years.

Okay...

All of the product shipments will be shipped in the second and third quarters. The product, David, is Q-Tof Micro, which isn't affected by any of the things we've been talking about.

Okay. I was under the impression that they are a few Q-Tof Ultimas as part of the project as well.

Okay, thank you.

Our next question comes from Carissa Marino from Goldman Sachs.

Could you please provide some perspective on the year-over-year increase in gross margin, SG&A and R&D? With the latter two is it primarily related to reduced leverage on the lower revenue base or are there any other factors impacting that? And the same question for the year-over-year increase in these inventories?

As it relates to the gross margin, we were able to increase prices at the start of year; that was true both in the United States and internationally. With the consolidation of the Euro we did pricing across Europe and we were able to get a little bit more favorability on price in the first quarter, which is what you're looking at. The increases in SG&A are rather modest versus what was an investment year last year. A lot of our spending this year from a budgetary perspective was pushed off into future quarters as we brought on board the assimilated folks that were added into sales and services at the tail end of last year. Your last question was on inventory, Carissa?

Yes.

Obviously, with the miss in the sales line we had a bit more mass spect inventory than we had anticipated. That's obviously something that we can deal with quickly as we move into the second quarter, and my comments earlier regarding potential bill related to this new Q-Tof product that we are investing in for the United States, which will be an incremental piece of working inventory for the time that I believe by the end of the year we'll be able to work down, so I think it's a temporary dynamic.

I'm sorry I didn't understand the dynamic you were referring to with SG&A and deferral and salespeople.

With regard to SG&A, I was really referring to a rate of increase last year that was much higher than what we're seeing this year. SG&A is up 4% on its own year-over-year this year, relating to obviously salary increases and some other spending, offset by some [favorable] impacts or effects on this line and perhaps lower commissions than you might expect with the sales down to where they are. So those are the factors mostly as to why we're looking at a 5% increase there. R&D, we haven't made any slowdowns in spending in R&D as it relates to the business. We plan to grow R&D a little bit faster than we do SG&A. We have a few additional expenses surrounding proteomics and some investments in lab folks that [hit] the quarter, but that's the reason for the 11% increase in the quarter.

The percentage of sales increase in SG&A year over year is related to the lower revenue base?

That's right. That certainly isn't where we would have projected it would be in the first quarter, but that truly is just a volume dynamic on sales.

_____]: I think in some cases ASMS is probably [_____] a result of this [_____] and we'll be talking to people about the Q-Tof position and where we are going forward. We are bringing out some new things on the sample prep side and on the inlet side of the systems with regard to [_____] and a few other places that we think significantly increased sensitivity, for instance, in those lines through chemistry - one of the strengths, obviously, with Waters [versus] [_____].

Great, thank you.

Once again, if you'd like to ask a question please press *, 1 on your touchtone phone. Our next question comes from Donna G. Takeda from Merrill Lynch.

Just one quick followup: currency, what are you looking at for the remainder of the year?

I'm looking at a couple of points for the remainder of the year. That's probably a little bit on the conservative side as we look at where currency is today; we've seen a fair amount of fluctuation with currency so I'm hedging my debts perhaps a little bit there, but that's in the current guidance.

That would be a true currency hedge, John?...Is that more Japan or Europe?

Certainly Japan from an overall rate perspective is much worse than Europe, but it includes both. The other factor, Donna, is as you look into our volume of sales outside of the United States this year it's up a little bit given the situation we have in the US with micro mass, so from a volume perspective I'm [_____] a little bit more in FX as well.

Okay, great. Thanks a lot.

Our next question comes from Todd Peters from American Center.

Thanks for taking my call. Just so I understand this: on the HPLC segment you are anticipating mid-teens growth this year and now it does look even like high single digits, is that correct?

No...

Our original thinking as the year began was when we talked about the 9-10-11 range for HPLC; it's been traditionally in that ballpark, sometimes it's a point or two less and sometimes it can be a point more but it doesn't vary that much as we go across time. So that guidance has not changed dramatically.

Okay, so what had changed was on the mass spect side, correct?

That's correct.

Okay, I had that reversed. Thanks very much.

You're welcome.

Just a quick one. Regarding your statement that you're shipping certain Q-Tof Ultima products, what percentage of the $80 million in 2001 US sales do these re-shippable products cover?

When you think $80 million, you're talking about overall Q-Tof sales worldwide.

Okay. When you went beyond the Quatro Ultima removal from the market and pulled further Q-Tof Ultima products, had you at that time estimated how much of 2001 US sales were covered by those products?

The last time we looked through this at the March update, we had talked about the possibility that both Q-Tof and [Triple] combined would be in the $30 million dollar range. That was the last look that we'd taken with regards to providing guidance as to what the magnitude of the situation was with both of those product lines.

We said that we anticipated being able to get back in the market with our Q-Tof family in the second half of this year. And now we're back in with the Q-Tof electrospray version currently, although we won't be up to volume shipments until the third quarter.

Can you offer us a range for the revenues in that product in 2001? I'm just wondering how much of the revenue loss from pulling products off the market is now theoretically regained by bringing this product back to market sooner.

Not significantly, because we always thought we'd be shipping it in the third quarter and we're shipping it a little faster because we're out there now. But that's encompassed in our guidance.

Okay, thank you.

You're welcome.

Just a followup of HPLC. Doug, you talked about international being strong and your expectation is for it to remain strong. I'm having a hard time understanding what gives you that conviction. I know you've talked to some customers; do you have strong orders in the book here that give you that conviction? If you could just elaborate - you know, pharma in my view is pharma, why the international...?

I appreciate your outlook, Scott. You wouldn't expect a European pharma company to be immune from anything affecting the overall industry. What gives us more confidence is that it's not a dynamic related to the one country in the pharma market, I think it's every country. So that once again is from many, many different pharma companies; some of them not as large as Bristol-Myers, for example, but every country in Europe - maybe with one exception - were good strong double-digit growers in the quarter and we've had them specifically [walk out] to the second quarter. Obviously forecasts, the longer out you get, are subject to more uncertainty, but country by country we're rolled up their expectations for the second quarter and those are consistent with what is seen. And that's all rolled up by salesman, by territory, by country. The same, by the way, is also true of Europe. I think across the board we're seeing it in Asia and in Japan. It's possible - this goes back to an earlier question somebody had about competitive situations - that in these areas we've taken more share than we think but I'm hesitant to claim that at this point. I think it is broad-based - it is in countries in Europe, countries in Asia, and countries in Latin America.

Okay, that's helpful. Thank you.

Sir, I'm showing there are no questions at this time.

Okay. Thank you all very much for taking all this time to spend with us today. I'm sure I'll look forward to our next call with greater expectations. Thank you all.

This concludes our conference for today. Thank you for attending. All parties may disconnect at this time.