Waters Corp (WAT) 2003 Q3 法說會逐字稿

Good morning and welcome to the Waters Corporation third quarter results conference call. All participants will be on listen only until the question and answer session. This conference is being recorded. If anyone has any objections, please disconnect at this time. I would like to introduce your host for today's call, Mr. Douglas Berthiaume, Chairman President and Chief Executive Officer of Waters Corporation. Sir, you may begin.

Thank you. And good morning and welcome to the Waters Corporation third quarter 2003 conference call. With me on the call today as usual is John Ornell, the company's Chief Financial Officer, John Nelson, the company's Chief Technology Officer and Gene Cassis, the Vice President of Investor Relations.

As is our normal practice, I will cover the third quarter's results. John Ornell will then take you through the financial details and our fourth quarter and full-year 2003 forecast. After that, we'll open it up for q & a. Before I begin, I'd like John Ornell to cover the safe harbor language, please.

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 Q4 2003. We caution you that all such statements are only predictions and that actual events or results may differ materially.

For a detailed discussion of some of the risks that could cause the actual performance to differ significantly from present expectations, see our 10-K annual report for the fiscal year ended December 31st, 2002 in part one under the caption business risk factors. We further caution you the company does not obligate or commit itself to update predictions.

We do not plan to do that, except during regularly scheduled quarterly earnings release conference calls and webcasts. The next earnings release call and webcast is currently planned for January 2004.

Thank you, John. Overall our third results were pretty similar to what we've seen in the last few quarters. Sales revenues increased 7% and earnings per share, before and in process R & D charge were up 14%.

We did see changes in the trends of our underlying businesses during the quarter. Although or chromatography products grew 5%, in local currency terms, our geographical in the market results shifted somewhat. The U.S. HPLC business, particularly pharmaceutical accounts, noticeably strengthened in the third quarter.

We were particularly encouraged by good, strong growth in our data products, and particularly our network data products. These and other things tell us that signals seem to be pointing to some improvement in the U.S. pharmaceutical investments.

The HPLC business in Asia also remains quite strong, with all the major countries of Asia, including Japan, China, India and Korea turning in good results. The one weak area in HPLC is western Europe.

This has been a trended this year and we don't see any current signs that it will dramatically improve in the fourth quarter. The weakness in Europe is prevalent in the large countries of England, France and Germany, with pretty -- currently pretty weak pharmaceutical investments in these countries.

These dynamics are largely affecting our hardware sales. On the other hand, our chemical products and service product lines continue to perform very well across the world. These product segments are continuing to produce double digit top line growth, while maintaining their already high profitability.

You put all these factors together for our global HPLC expectations, and we see a somewhat improved overall situation in the fourth quarter. In our mass spectometry product Area, we achieved a major milestone with the new Quattro Premiere instrument. We are encouraged by reaction to this model and believe we can substantially rebuild market share in the high end segment of the marketplace.

We continue to do well in the broader MSMS segments that includes the QuattroMicroproduct line. It continues to grow by more broadly penetrating applications, and by motivating customers to trade up from single stage mass spectometry.

These successes are however, tempered by the significant weakness in our Q-Tof position. Our position still struggles with the after effects of the patent litigation. However, we believe the most significant dynamic affecting this product line is the slowing in proteomic investments.

Although we do not expect a turnaround to growth for this product line in the fourth quarter, we feel it has essentially reached a point that is stable and has the clear potential to grow in 2004.

During the quarter we also had disappointing magnetic sector sales, as some plan sales into environmental laboratories were delayed. Globally, these dynamics resulted in mass product sales being down in the midteens. However, when you adjust 2002, for the sale of the inorganic product line, you'll recall we sold a product line in the first quarter of this year. So you adjust the base and make an apples and apples comparison, mass spec is down about 10%-- third quarter of this year versus third quarter of last year. That's some improvement over the second quarter results.

So we're seeing some gradual improvement in our mass spectometry performance.

Our thermal analysis product line continues to perform well. Showing good growth even before the effect of the acquired Rheology product line. The combining of the acquired Rheology operations with our existing thermal business is going well and we see improved productivity from combined operations coming in the next few quarters.

Before I turn it over to John for the financial details, I'd like to talk briefly and talk qualitatively about 2004.

First, from a market climate point of view, we think we will see a gradual improvement in conditions in our key life science customer base next year. We think U.S. pharmaceutical accounts will be noticeably better, while we think Europe will continue to be a challenge. But we don't think Europe will get any worse than we're currently experiencing. Asia markets we predict will continue to stay strong.

I think what's more important and encouraging is the strength of our internal new product pipeline for 2004. You heard me talk about the launch of the new Quattro premiere which will provide a full-year opportunity in 2004. We are also in the process of launching a new single stage time of flight instrument for life science applications called the LCT premiere. We are optimistic about its growth opportunities next year.

Finally, we are on track to launch an ASMS in 2004, the next generation of Q-top instruments, which we believe will help redefine the playing field in high end mass spectometry. We are also preparing to launch new capabilities including chemistry and software that combine with these new high-end mass spectrometers, Which we think will improve on existing proteomics applications. You will hear more about the initiatives as we move through the first half of 2004.

We are also excited about what we have on the plate for HPLC in 2004. We have just completed the acquisition of Creon, and when you combine its capability in high-end network data capabilities with our market-leading position in chromotography, we think an opportunity awaits for us to expand into auxiliary areas such as electronic record management and e-lab notebook applications. We think that the market for this broad area of scientific data management is primed to grow. We think we are now positioned to take advantage of this opportunity.

We continue to believe that value added data management is an important long-term growth area for us. And we plan to continue to invest here in increased capabilities. We also plan to introduce an entirely new chromotography system at the Pittsburgh conference in March of 2004. This system will incorporate a higher level of performance than existing systems and is designed to raise the bar of high performance to a new level. We think this new system will be particularly attractive as part of a system utilizing mass spectometry.

So 2004 looks like an exciting new product year. If it combines with any kind of overall pharmaceutical and life science market improvement, we can have a very rewarding year.

Now I'd like to turn it over to John for the financial details.

Thank you, Doug and good morning. Financial results for the third quarter met our expectations with earnings per diluted share prior to a $5.2 million in process (ph) R&D charge of 33 cents for the quarter, versus 29 cents in the third quarter of 2002.

Earnings per share this quarter included the in process R & D charge which relates to the acquisition of the Creon business, and we're 29 cents after that charge.

Sales (inaudible) grew 7% on a reported basis, which includes continued benefit from favorable foreign exchange dynamics providing 5 percentage points of growth this quarter. HPLC grew as expected sat 5% in constant currency terms.

As you may recall, last year's third quarter was a strong quarter for HPLC, which we expected, with tempered comparisons this quarter. Achieving this growth rate given the strong third quarter base is encouraging, and we look forward to a continuance of this trend into the fourth quarter. Our mass spectometry product shipments (ph) declined 15% this quarter and adjusting for the sale of the inorganic mass spectometry product line this year, the mass spectometry sales declined by 10%.

While we were able to grow our MSMS (ph) business with the shipments of the Quattro Premiere late in the third quarter, we continued to experience reduced demand for Q-top products and our large sector instruments results in the overall mass spectometry sales decline this quarter.

Our thermal analysis business continued its positive performance with growth of 28% this quarter, which includes the acquired products from Rheology. Before adding those products, TMA sales grew 9% this quarter. Looking at sales from a geographic prospective, U.S. demand for our mass spec and HPLC products for pharmaceutical customers improved from levels observed in the first half. We expect these improvements to continue into the fourth quarter.

We have not yet seen similar improvements in Europe, and sales decline monthly during the quarter. Japan saw strength in HPLC growth and declines in mass spectometry, which caused Japan's overall business to drop slightly. Asia continued to grow with good strength in HPLC products offsetting weakness in mass spectometry sales. Gross margins improved this quarter by about 30 basis points over Q2 last year due to manufacturing cost savings and foreign exchange benefits.

Operating expenses came in as expected and were up less than sales growth, both heavily affected by currency. Foreign currency translation caused the majority of the SG&A increase, as well as a small increase from the Creon acquisition. We continue to spend cautiously in this (inaudible) economic environment to hold the (inaudible) and SG&A spending below sales growth. Our effective tax rate excluding the end process R&D charge, remains the same as last year, at 23%, which we believe is sustainable for the foreseeable future.

The nondeductability of the in process R&D charge brings this quarter’s (inaudible) rate to 25.4%.

As previously disclosed, our Board of Directors approved a $400 million (ph), two-year stock buy back program in May, and we have been busy executing the program. Since May, we have purchased 5.2 million shares for $151 million.

In the first quarter, we completed the initial buy back program with the purchase of 4.3 million shares for $100 million, bringing this year's total purchases are 9.5 million shares for $251.8 million.

Continuation of this program will result in short-term borrowings in the United States, over the next few quarters due to timing of cash movements from international locations. We continue to maintain a strong balance sheet with precash flow of approximately $34 million for the quarter, which includes a $5.9 million cash settlement regarding an environmental matter previously disclosed.

Without this unusual charge we generated $40 million of free cash during the quarter.

Inventories are down from the start of the year and down from Q3 last year as well. Accounts receivable day sales outstanding are 77 days this quarter, up from 75 last quarter. This is less favorable than planned. We are working to bring it back on track during the fourth quarter.

Turning to free cash flow, our current projection for 2003 is estimated at $180 million, Before considering $60 million in unusual payments for litigation and environmental matters.

$180 million in free cash flow is expected to be equivalent to our estimated net income for the year prior to unusual charges. Capital expenses are expected to offset depreciation and amortization expenses and working capital is expected to remain neutral.

Turning to the fourth quarter, we believe sales will grow in the mid to high single digits, with currency compromising approximately 4% to 5% of this growth. At this sales level, earnings per diluted share are projected to be 47 cents with the normal 1 cent to 2 cents tolerance for the quarter. This would bring it to $1.43 before unusual charges.

We currently plan to provide guidance on 2004 during our January conference call in conjunction with the finalization of our budget process.

Thank you. I think we now could open it up for Q & A.

(Operator’s instructions) David Zimbalis (ph), of Blaylock and Partners.

Couple of questions. First, when will you be shipping the LTC premiere?

In the first quarter, David. We might ship some at the end of the fourth quarter, but our current intention will be volume shipments in the first quarter.

And then if you talk about the acquisition of Creon or your new program in data management, what we should be expecting in term its of the kinds of investments you're going to need to make? Are we going to see a lot of capitalize software expense as part of ramping up that business? Just talk a little bit about that strategy a little bit more.

Sure. I think it is an area that -- our level of excitement kind of exceeds the absolute level of investment we made in Creon. It's roughly a $15 million acquisition. But what Creon does, is give us the ability, you know, to broaden outside this more tightly defined of chromotography data management. The whole area of electronic records management, some people call it scientific data management, is certainly something we've looked at for Oh, several years now.

The federal rules on 21 CFR, part 11 requiring electronic records retention and electronic signatures and stuff, has been a somewhat confusing regulatory environment over the past three years. With, I'd say, kind of sporadic enforcement or interpretation of what it means-- principally for pharmaceutical companies, but for others covered by that requirement.

And people have not invested kind of at the pace that we originally thought they would. We now see that beginning to change. We see companies who have been looking at this whole area for a couple of years. And one of the things we think has held them back from making greater investments, is that most of the solutions that they can get are from relatively small companies. And there's a level of concern about other staying power and the investment capabilities of the smaller companies.

One of the things we're seeing already with the acquisition of Creon, who has a first generation product for this broader data management universe is that a number of our large pharmaceutical companies are coming to us saying, we want to hear about you and Creon. We want to hear about your position. Even some companies that refused to deal with Creon when they were a smaller, stand-alone company are now actively soliciting what we're doing and what our approach is going to be.

So we think it's exciting. We don't think that you're going to, at this stage, see a noticeable change in our capitalized software or our R & D spending. You may see a very slight noticeable amount. But at this stage, we're continuing to think we can accommodate this by just moving R&D spending around in our base. We're coming to the end of some large programs like the Quattro Premiere. We're well down the line on the Q-Tof the next generation Q-Tof We think we can balance that within the mix. We're actively looking for ways to expand the portfolio, you know, a la Creon.

Essentially the incremental R&D spending in the quarter relates to things like Creon? It's starting to have an impact?

There's a little bit, certainly, of R&D Creon there. There's spending in life sciences or a few efforts that are under way. The spending was up 2 or 3 points from the average, but we expect that to go down again.

Last question. You had a little bit higher interest income than certainly – by the way I’ve been modeling it, it was a step up from what your run rate has been excluding the reversal of interest accruals for the AVI settlement. Can you talk a little bit about what was going on there?

Yeah. We had some forwards that created some interest income that was a little bit higher than we expected. Some of the rates overseas were up.

We had a small adjustment in the quarter for an overcharge in a previous quarter, a couple hundred thousand. But generally speaking, with the loan balance increasing, as you've seen, we would expect that to come down in the fourth quarter, David.

Okay. Thanks.

Kenneth Goldman of Lehman Brothers, you may ask your question.

Can you expand on the new Quattro Premieres? A, how many were sold, how many do you expect to be sold in the next quarter? And b, we've never gotten specs on the analysis? Do you have an independent analysis on that?

The next question, AVI this morning inferred that the new hybrid was starting to capitalize their 4,000 triple quad. I wonder what implications that may have on your triple quad?

On the AVI hybrid, they're probably better put to describe those dynamics. I wouldn't say that right now at the stage of the introduction of the Quattro Premiere that we're seeing in that politic the hybrid. We're still looking principally at competition coming from the classical triple quads.

As it relates to what we have done, I think what we said in terms of revenue expectations for the new triple, we said in the second half we would expect between $5 million and $10 million of revenue coming from it-- most of that coming in the fourth quarter as we ramp up production. We still feel comfortable with that portrayal, Ken.

Okay. Last question about the sensitivity specs, either your analysis or early access customer analysis?

I'll let John Nelson take a bite out of that.

The sensitivity specs obviously is a pretty broad definition. I think the best way to describe that is two points. We've seen products coming off the production line, one, being very consistent, two, being slightly better than we actually thought we were going to see and then the other point I'd mention is we're seeing very good performance in head-to-head demos against competitive products.

So I won't go into the specifics of which ones. But when rids sample against sample in a laboratory environment, we're very pleased.

Yeah. I think published specs here, Ken, on the key sensitivity area I think are roughly equivalent for all the players in the triple quad marketplace. The real key is what a customer is seeing in real-life demos.

As you know, when the manufacturers talk about this, they try to talk about the applications that make their instruments look the best, whether they're high flow or difficult compounds or what have you.

I'd say what we're seeing right now is on those key sensitivity parameters, in the demos that we're running and customers are running, we're not losing many of them. So, it's early. We'll get better data in obviously another quarter or two, but we think in the hands of real-life demos, we're doing better than holding our own.

Thanks very much.

The next question is from UBS.

This is Derik deBruin (ph) You mentioned that the proteomics market is looking a bit weak. Could you address how the new Q-TOF product is being engineered to meet what you're seeing as needs in the market?

Sure. I'll take the first stab at it and maybe John can elaborate. I think there's no question in our mind that there's a huge amount of interest in proteomics. We've certainly when through a wave of proteomics investments in 2000, 2001. And we continue in that wave of proteomics investments we would say was really focused in the academic government lab arena and in the biotech arena.

The large pharmaceutical companies have not weighted in extensively in the proteomics realm. We've all been waiting to try and encourage them into that arena. I think we can say we see signs of more and more of that happening. But we're still in the realm of looking at proteomics (inaudible). Some could be funded by large big pharma, but most of it was being accomplish outside of the realm of big pharma.

And what we're seeing in the last year or two, granted, it also coincided with our patent troubles, and so we had multiple dynamics going on. But we clearly see the overall level of pull having modulated. It's modulated, I think, because people are now kind of rethinking exactly how they're doing side by side studies. They're looking at whether they need to do more with sample prep, how many samples do they have to look at? How do they deal with the data coming through this?

I think a lot of that is not unlike a number of other technologies and applications that we've seen over the years. We do think that the technology on both the hardware and the data side in the sample handling and front end of these systems has to get better.

That's one reason we're encouraged by our approach and what we're going to bring next year. Because it's not just a new, more sensitive Q-TOF, although we think that's an important ingredient. But we're also, as I alluded to, very enthusiastic about a new set of chemistry and software that we think can significantly improve your ability to separate and analyze proteins in large-scale proteomics-like studies.

It's that combination of value-added software, chemistry and management of samples capability combined with more powerful mass spectometry that we think will be significant. So that's why we get more -- I don't think that the proteomics market will explode come January 1, but I think we'll have very good reason why a number of these customers will be interested in examining our new capabilities.

Okay. Just two other points. Are you still, is your plan on share repurchases still about $50 million per quarter?

Yeah. I mean, we have perhaps taken a little bit of advantage of what we feel is a reasonable share price in the last couple of quarters, but as we model going forward, we look at $50 million a quarter.

Then just one final question. Could you talk about the thermo analysis? You've seen pretty good growth. You had 9% growth this quarter, it was strong last quarter. Can you talk about who's buying and what you're looking at in terms of what is the normalized growth rate for that business?

Sure, John, you want to? This business reports to John Nelson.

One thing I kind of remind you of is that TA has, in the past two years a complete new product line has been introduced, much like we do with HPLC. Their new line of DLC has significantly improved the performance of the systems. That I think has been something that DSC -- differentials scanning calorimitry (ph) -- that's involved in about 60% of all thermo analysis sales.

These new systems are being extremely well received. They really do raise the bar in terms of the ability to resolve small differences in thermo properties. And that's an extremely important dynamic here, the technology essentially hasn't changed much over a ten-year period. So now we put something into marketplace that really does open up their ability to see new things. We're quite pleased with the business. It's heavily industrial.

So you see it in the traditional polymer counts, fine chemical. Surprisingly, we see a fair amount of it as well in the pharmaceutical accounts, in terms of the maturities and the like.

Generally speaking, I think it's being driven by the presence of an enhanced new technology with good software an a well established field, TA has an excellent reputation. And in general, we've been quite pleased with it.

I think just to elaborate a little bit, the U.S. has been particularly strong. And, again, strong across our traditional customers, but in this emerging area in pharmaceuticals it's not in our traditional area of pharmaceutical research. It's more looking at materials characteristics. But that's been a pleasant area of growth in that market.

Darell Pardy (ph) of Merrill Lynch, you may ask your question.

Can you describe demand for HPLC for your industrials?

Actually I'd say our first half demand in industrial accounts was stronger than our third quarter demand. It was still positive in the third quarter but we saw, you know, strong growth in the first half.

Now, in the U.S. we're a little bit stronger than we are in Europe. We're seeing weak conditions pretty much across the board. That includes environmental labs and industrial politics, too. So we're not terribly concerned about it right now. We had a little bit stronger industrial business in base last year than we typically had in the third quarter. We Don think that there's anything fundamentally going on and we think we're still in a reasonably good position in those industrial applications.

Okay. So you'd think sort of a continuation of Q3 trends into the rest of the year?

We expect it will be a little bit better industrial in the fourth quarter.

Okay. Just switching gears for a second, on the HPLC front you talked about strength or broken down strength between instruments, service and consumables in Europe. Could you talk about that in the United States, too? Are you seeing a pickup in demand for instruments or is it primarily --

Instruments were stronger in the U.S. than they were in Europe because Europe was our weakest area kind of across the board. But service and chemistry have been strong across the world. So in the U.S., chemistry was very strong. Service was very strong. But in that particular area, Europe was good, too. A little bit softer than -- a little bit less strong than the U.S., but still pretty strong.

The message there is that our consumables business in chromotography is pretty skin in the demand. These systems have to be supported. The projects being done in all of these companies require consumables to keep them running. We have, I think, continued to be as good as anybody in providing the new chemistry products that, you know, open up new applications and improve the performance.

I think that's the situation in that piece of the business. That's good across the world. The hardware and data business is softest in Europe.

Okay. I guess a better way to put the question was that the improvement in demand that you saw in the U.S. from pharma, was that across all three pieces of the HPLC business?

Yes.

Sara Michelmore of SG Cowan.

Just a question on HPLC, Doug. It's strong in the U.S. Can you tell us where there are certain questions, is it QA/QC, drug discovery, et cetera, et cetera?

If you think about the three areas of pharmaceutical research being discovery -- well, two areas of research. Discovery and early stage, then development and later stage development, and finally QA/QC. It's the development in the QA/QC applications that are still the strongest. We see generally weaker conditions in the early stage R & D areas of these companies.

QA/QC as I recall has been relatively strong for you guys. Is the pickup primarily in the development areas?

It's both. This quarter we saw good strong results in both QA/QC and in development. It is fair to say it's relatively newer in the development piece of that.

Okay. And John, I was hoping with your Q4 projections for the sales, can you break down sort of your expectations for HPLC and mass spec growth that quarter?

For the fourth quarter we're looking for HPLC to be up mid-to-high single digits where mass spec given the inorganic in the base is still going to come in down in the high single digits. At TA, we expect it to continue its trend up in the high single digits before considering the rheometrics add-on, if you will. So similar performance net for TA Q4 versus Q3.

Okay. And can you tell us what foreign exchange added to EPS this quarter.

It added about 2 cents.

Lastly, looking at the free cash flow target you were talking about $180 million. I think before -- I think at the end of Q2, excuse me, you were talking about a target more like $200 million?

That's right. We had been looking to achieve 200 million, actually all year that was our target.

As we moved into the third quarter and looked at more difficult environment reduced shipments of Q-TOFs that had a fairly high amount of deposits attached to them, that obviously is at a reduced volume that is an impact to that, obviously, cash flow. Some of our inventory targeting programs while we're down versus prior year, we're not down as much as we had hoped.

We originally planned to squeeze a bit more out of working capital on the inventory side. A little bit higher expenses, or costs I should say, in pension funding and the like, which I'm sure many companies are facing as well in the current environment, all add up to a little bit of deterioration in a few areas in working capital that prevent us from moving much beyond net income for the year.

Okay. My last question, on the Quattro Premiere launch, can you talk about pricing in that market, place and if you guys as part of the launch strategy here are doing anything with price?

So far we haven't seen any dramatic change from what I'd call traditional pricing in that environment. So it's early on and we haven't sold that many instruments. But we're not seeing wholesale deterioration in prices.

You're roughly, ASP is roughly 350,000 in units or something like that?

I think the ASPs across the board are a little lower than that. But they're not lower than we were realizing on the Quattro Ultivar (ph) they seem to be at a similar stage.

Thanks very much.

Steve Unger, Bear Stearns.

Could you comment on the pricing environment in HPLC both in the high end of the market and the low end of the market?

Sure. I'd say that pricing has ABN Amro stable. I'd say that's no different than it's been for, God, 5, 6, 7. maybe 20 years. There have been traditional competitors who try to compete on price, but it's -- it's not been anything where we've -- in any one off situation you might see a little bit more aggressive price competition, but it's not a dynamic that I'd say is a broadly characterized one.

You haven't had a change of pricing strategy given the weakness in the U.S. dollar?

No.

Okay.

We have traditionally viewed our international businesses as being essentially local businesses. We price on local currencies. And when the dollar strengthens, we are not able to dramatically increase our local prices. Beyond what we've been able to do traditionally. And when the dollar weakens, we're not really faced with lowering our presence in local markets.

It's, I think, a strength because we treat them as local markets.

Great. Thank you.

Larry Neibor, you may ask your question.

Good morning. You're putting increasing emphasis on your data management software, electronic record keeping, electronic lab notebooks. Can you tell us what you think the size of that market is and the type of position you have in it and the type of growth you expect from the market?

Sure. I mean, the market's relatively small right now. If you look at the whole field of scientific data management or electronic records management, you'll hear the terms used interchangeably. I would say in the way we play and what the current serve market is, it's probably about a $100 million market.

We think that that $100 million market, you know, if you talk about growth rates here, the market's so relatively small now that the growth rates could be very high. Because if we really at an inflection point and these companies are going to start to move down a more standard product path.

I think that's really the key. The actual market here may be bigger because you've got a lot of companies who have partially home grown situations. But it's kind of like home grown financial applications in your back office applications. Most of these companies don't want to be responsible for keeping these programs up to date and rugged and robust. It's just that they've not had anybody they could turn to to really provide a kind of robust long-term solution. We think that if we're right and we can offer that, there could be a significant move from count of home grown solutions that aren't really in that service market towards a standard product capability that we think we can offer.

So, the growth rates could be, you know, 40% a year over a five-year period. And that's the opportunity that we're looking at.

A quick follow-up. Is enforcement of 21-CFR, part 11 by the FDA increasing? Douglas Berthiaume:

I'd say it's becoming clearer--what these companies really can and cannot do. And I wouldn't say, if you'd ask me, three years ago, 21-CFR, 11, if it would have been vigorously driven the way I read the regs would have had everybody spending a ton of money early on possibly on software they regarded as not the most rugged. I think the way the FDA and companies are approaching it now says we now have a much clearer idea of what we have to do. We're ready to do it. We're seeing those kind of RFPs come out.

Now, I won't say there's a huge tidal wave right now of actual placement of orders, but there is a building backlog of kind of RFPs and seminars and customers who really look like they're on the verge of moving significantly down this path.

Great. Thank you.

Chris Moss, SB&W, you may ask your question.

Good morning, guys. Two quick unrelated questions for you. One a clarification for Doug. You indicated that I think you said you haven't sold too many Quattro Premieres yet. I wonder if you're saying you haven't shipped for revenue yet or have you actually not sold a lot of these.

Shipped for revenue is exactly right. I would say we are almost exactly where we thought we would be with this product introduction.

Very well. Thanks. Great. And separately, a financial item for you. John, we've talked in the past about the composition of the cash and cash equivalents. I guess I'm wondering as we see the notes payable and debt continue to increase with the buy back activity, do you have any more detail on breakdown domestically and internationally the cash and cash equivalents that you could provide at this time?

Certainly the majority of the cash that's left in the balance sheet now is overseas. There's certainly several million sitting in the states, but the majority you're looking at on balance sheet is overseas.

The good news on that front is that actually the interest income being earned overseas is particularly in the [ Inaudible ] currencies is higher than what we're paying on the debt here in the states. Economically, it's not a terrible situation to have as we work through movement of moneys to satisfy needs here in the states. So that's the short, quick answer.

A quick follow-on if I could. What then would you kind of delineate as a plan with regard to paying down those notes payable? Is that cash and equivalent abroad continues to accumulate? And thanks a lot.

Certainly the homeland investment act is one thing that's out there that's putting a little bit of cloud on some of our more traditional planning, thinking as to what we might be able to do. But we are looking at various strategies from a tax perspective as well as other legal entity perspectives that will allow us to move that cash beginning either late this year, early next year in a slug. And other amounts that will be able to move, perhaps later in '04 or '05.

These are in the planning phase. It's too early for me to come out and describe them in any amount of detail, but I can tell you we've been working pretty hard on them. Once we get through the wrinkle of what may happen with the homeland investment act, we will be able to better solidify our plans.

We don't foresee that this is a situation that will create any amount of inability of the company to operate efficiently on this front.

We think, let me add my two cents. Bottom line is that we think over the next six months or so that we have a plan, largely because of our restructuring of our Micromass operation that is appropriate and necessary and allows us to move funds around the world and essentially bring them back into the United States.

And we have a plan that's operating to that. And will result in us essentially moving those cash balances and paying off the debt. I mean, that's what we're aimed at. We're pretty confident about being able to do that. You know, whether it's one month or the next, the new homeland security that may allow to you dividend large amounts of a relatively small tax price to pay. So we want to look at that and make sure we're not giving anything away. But that may never be passed either. We think we can do all of this for no tax penalty.

So that's what we're trying to do. We think we're well along that path. And you should see that accomplished in the next six months or so.

Great. Thanks a lot.

Scott Wilkin of UBS ask your question.

Just a question on the mass spec business. I don't think I caught your commentary on Europe. And what extent do you think the new premiere will result in new de novo instead of swap outs?

What we're seeing in HPLC is similar to what we're seeing in the mass spec world. Europe is soft. About the only area we don't see softness is in our thermal business and that is largely a different customer set. As it relates to the Quattro Premier, when you say swap outs, I assume you mean swapping out something else that we're selling?

So what extent you may be replacing those systems with the new one?

We think the net effect is going to be positive for us.

For those of you that don't understand, we are selling the Quattro Ultiva in Europe, where we are (inaudible) from selling that in the US.

But, the Quattro Premiere is a better instrument and we anticipate that we'll see a net positive impact. It won't be a one for one.

We will clearly trade off Ultivas. It won't be quite the same situation as it is in the U.S. It improves our competitive position in Europe also.

And just, Doug, in the U.S., could you maybe -- I know you're not comfortable talking about units for that new launch, but cow maybe talk about demo lab trends? How many demos you're doing per month? And maybe to what extent the demo lab is backlogged? That would be helpful.

I would say, Scott, because I ask this question almost every day, the demo labs are fully booked.

Up till when?

You know, through this quarter.

Okay. That's great. And you know, you've talked in the past just about backlog trends and the various businesses qualitatively, could you do that this time?

What was that.

Backlog trends, just directionally?

Our performance was not significantly impacted by backlog trends. Our order rates and our sales rates are essentially in line. So I wouldn't you have believe that we go into the fourth quarter with a huge benefit coming from backlog or a huge detriment. About business as usual.

That's helpful, guys. Thanks.

Frank Shanley, of (inaudible) you may ask your question.

I have a question back on cash, cash flow, share repurchase, et cetera. And simply given that you've been a free cash flow generator for years and years and really have been essentially a no debt company and understood you've incurred debt to repurchase shares. I'm just wondering is there any consideration, you know, given the new tax laws here for maybe cutting back on share repurchase and directing that cash to payment of a dividend?

Yes, there is some consideration. I would say that the topic has been discussed preliminarily at the board level, and we intend to revisit it again over the next six months or so.

The general feeling is that where we came out of the first time is that while certainly the playing field has been leveled somewhat with the reduced penalty on dividends, it hasn't been totally reduced. But it is -- it is an important consideration and we are going to continue to evaluate that, and it's fair to ask me the question in another three or six months. And I will either tell you yes, we think we are going to move down that path or we still think that stock purchases is a better use of free cash flow.

Okay. Thanks very much.

You're welcome.

David Zimbalis of Blaylock, you may ask your questions.

If you could talk about the specific areas in mass spectometry. And if you could talk a little bit about the contribution that Creon will make to revenues this quarter and in the next '04 and perhaps -- the fourth quarter and perhaps 2004 preliminary number.

Oh, okay. On Creon in this quarter it was deminimus (ph).. It was acquired well along in the quarter. It was, you know, not a significant revenue piece of the quarter.

Next year I would expect that the individual product lines at Creon, you know, are individually probably in the area of, you know, $8 million to $10 million. But that would understate -- that would just be the continuing momentum of the existing product lines. Our plan is that we ought to be able to leverage that into a more significant presence.

David Zimbalis Is that because of your channel to the market or is that because of products that you are creating through combining --

That's a combination of the channel. It's a combination, because we have much broader reach than Creon individually. It's a product of the improved credibility that they have as now being a water product line. And it's a product of much more significantly incorporating our millennium and Empower software into this broader, you know, software for electronic records management.

So right now they just sit atop a lot of this data that's coming out of chromatography (ph) and other scientific instruments. We plan to integrate those capabilities. We believe that will be a significant attribute of value-added.

Can you talk triple quad?

What we're comfortable in saying is that triple quads grew nicely, even though we only introduced Quattro Premieres at the end of the quarter and are just at the front end of that build, our Quattro Micros are doing very, very well. On the other hand, some of that's coming at the expense of single quads were selling up in the triple quad business.

David Zimbalis When you talk about triple quad -- single quad, you're talking about ZQ primarily?

Yes. On the other hand, Q-TOFs were down significantly.

David Zimbalis Sequentially or year-over-year?

Year-over-year. And these other product lines magnetic sectors aren't one of our largest product lines, but, you know, it was up against a good quarter in Japan last year for dioxin analysis.

Those systems were delayed. We're anticipating other environmental systems in the sector business. That was a very soft quarter for sectors. Those were the two most significant product line dynamics that we're comfortable talking about.

David Zimbalis In terms of the magnetic sector, can you talk more about delays? Are these orders that are in place or that are essentially done but not shipped?

They're orders that are being worked. We are -- we believe that the fourth quarter will improve, but I'll tell you, we haven't fully baked what didn't happen in the third quarter into the fourth quarter, because we're still leery about how fast these orders will actually be let.

Okay. Not to put you on the spot, but Merck announce they'll be reducing their work force and that sales and whatnot are coming in. You generally don't talk about specific customers, but could you address issues of that as it relates to the recent strength in U.S. pharma?

It's certainly something that's been on our mind because, pharma’s troubles have been well documented and we're seeing a number of customers have to come to grips with where they go and what are they doing. We have a number like that, of course, we also see a number of companies-- You know, one of the European dynamics may be that a number of European companies are putting more R&D resources into the U.S. Glaxo has always had a strong U.S. presence, and they're probably putting more into the U.S. versus Europe.

So while we continue to see some of those instances with large pharma cutting back, we ill tell you that one of those large pharma companies. Traditionally it has happened exactly this time last year and was not unlike it this quarter. They announced layoffs and restructurjngs. We also saw this quarter and we've seen it in the past, them place very large either replacement system orders or new orders with us in their U.S. operations.

The fact that they're cutting back and looking at ways to save money doesn't necessarily directly relate to where they're spending either replacement moneys or new moneys in the R & D mode.

Obviously we'd all be better off if all of those pharmaceutical companies were dramatically expanding their R & D capabilities, but I would say we see those dynamics. They're built into the run rate. And overall, we still think that we're probably, you know, hit the trough rather than still riding down the trough.

David Zimbalis One last question. Since you have the issue of sort of tweaking down your cash flow targets for the year, cow talk a little bit about where you think you can get to over the next couple of years as you've worked through a lot of your payment systems, your DSOs you should be able to drive down and what not.

What kind of target do you think you can get to on DSOs, capital management, is that a source of incremental cash flow for the next couple of years or will it be giving back at this point.

That's a question we'll answer more succinctly in the January call. If you look at free cash flow going forward, it's modeling something close to our net income and we're expecting, generally speaking, to grow net income year-over-year. The midteens is traditionally our target rate.

We'll come out with a plan that will announce in January. I think looking at free cash flow, moving with net income and being able to hold neutral generally speaking, working capital, except in perhaps years where there's something exceptional, I think would be generally speaking the target.

I think -- I know that pound for pound our traditional cash flow generation has been amongst the best in our industry. I say that's the one area where we haven't been pound for pound the best has probably been in inventories.

We think there's a little room in inventories but one quarter of a DSL pop in a couple of days doesn't a lifetime make. I think overall our receivables performance has been good. Our other areas of working capital we don't spend a ton of money on capital. I mean, most companies in our industry are spending, you know, a lot more than 3 cents per dollar per sale on capital spending. They're spending 10 cents, 15 cents per dollar of sale. We get a lot of leverage on the basic way we run our business.

But I think there are ways for us to get a little bit better, but I don't think you're going to see a quantum leap. You're more likely to see our cash flow grow in line with other earnings growth.

Thank you.

We have no further questions.

All right. Thank you, operator and thank you all for being part of the call. We look forward to talking next quarter. Thank you.