Waters Corp (WAT) 2005 Q1 法說會逐字稿

Good morning and welcome to the Waters Corporation First Quarter Financial Results Conference Call. All participants will be able to listen only until the question-and-answer session of the conference. 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 conference, Mr. Douglas Berthiaume, Chairman, President, and Chief Executive Officer of Waters Corporation. Sir, you may begin.

Thank you. Good morning and welcome to the Waters Corporation first quarter financial results conference call. With me on today's call is John Ornell, the Waters Chief Financial Officer and Gene Cassis, the Vice President of Investor Relations.

As is our normal practice, I will provide an overview of the first quarter and then John will take you through the financial details and lay out our second quarter and full year 2005 outlook. Finally, we'll open it up for question and Q&A.

Before I begin I would like John to cover the cautionary language.

During the course of this conference call we will 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 Q2 and full year 2005. We caution you that all such statements are only predictions and that actual events or results may differ materially. For detailed discussion of some of the risks and contingencies will cause our actual performance to differ significantly from our present expectations, see our 10K annual report for the fiscal year ended December 31st, 2004, in Part 1 under the caption Business Risk Factors. We further caution you that the company does not obligate or commit itself by providing this guidance to update predictions. We do not plan to update regarding possible income results except for our regularly scheduled quarterly earnings release conference call and webcasts. The next earnings release call and webcast is currently planned for July 2005.

During this call, we will be referring to certain non-GAAP financial measures, a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measure is attached to the company's earnings release issued this morning. In our discussions in the results of operations, we may are refer to pro forma results which exclude the impact of restructuring, one-time, and facilities related charges.

Thank you, John.

Well, as many of you know, we issued an update to our first quarter sales and earnings guidance in late March. In that communication we cited weakness in our European business as a primary cause for reducing our revenue projection. In our January 28 call our outlook was for 13% sales growth in the first quarter, and then in March we revised our outlook to a more conservative 3 to 4% growth range. As it turns out, our results from the first quarter were slightly better than we anticipated in that late March release. Sales grew a little over 5% and earnings at $0.38 were ahead a bit of prior year's performance. Cash from operations after capital expenditures were strong and came in at $67 million. And John will cover details on this shortly.

Turning to the situation in Europe, in the first quarter we saw a decline in sales in comparison to the first quarter 2004. Within Europe, the weakness was geographically pretty widespread and not specific to a product line or a few major accounts. At this time we believe that our business in Europe should improve as we move through 2005 and that it was principally delays in orders mostly from our large pharmaceutical accounts that resulted from the first quarter shortfall.

It is interesting to note that we have seen longer delays in releasing capital budgets in recent years at many large pharmaceutical accounts. The effect of these delays has been to push orders into later quarters in the calendar year. This trend appears to be continuing this year and is maybe even a little more pronounced.

Recently as we collect feedback from our sales force and from customers, we are led to believe that business will improve and that Europe will likely finish the year with a modest amount of sales growth.

While we were experiencing this slowing in Europe, sales growth for our other major geographies, North America and Asia were somewhat less than we had expected. It appears to us that generally global spending at large pharmaceutical accounts was soft and we attribute this softness to delays in the release of capital budgets. In addition, we believe that new governmental policies in China result ed ed in the tempering of our growth in Asia.

On a positive note, industrial spending continued to favorably impact our results with double-digit growth in the quarter. Our TA Instruments group, a business with a heavy industrial focus and a refreshed product line, delivered another strong double-digit growth performance. Looking ahead, we feel that this positive trend in industrial spending will likely continue throughout the year.

Turning to our products and focusing on the Waters division, overall sales growth rates for liquid chromatography and mass spectrometry instruments were adversely impacted by the weakness in Europe where even the recurring segments of our chromatography business, the columns and the service business were under pressure. Globally, however, the new Acquity UPLC-based systems sales for this product line during the quarter exceeded $15 million. And customer interest in this exciting separation technology continues to build with the heaviest demand from customers involved with life science research.

More that 70 percent of Acquity sales were the customers in pharmaceutical accounts. The Pittsburgh conference introductions of new column chemistries and new detection technologies for Acquity are expected to further broaden the range of applications for UPLC. In addition, we are confident that this year's ASMS meeting in June will provide an opportunity for researchers attending presentations and poster sessions to more fully appreciate the value of UPLC used in conjunction with mass spectrometry.

Our mass spectrometry business benefited from strong demand from the Q-Tof Premier product. First quarter sales of this recently introduced instrument resulted in double-digit growth for the Q-Tof product line. This quarter we begin to plan shipments of the protein expression system, an application directed solution that combines nano-Acquity technology and advanced bio-informatics with the Q-Tof Premiere. This system promises new levels of qualitative and quantitative information for protein analysis.

Looking at our other mass spec lines, Tandem Quadrupole sales grew at a mid-single digits rate in the the quarter while single Quadrupoles and magnetic instrument sales declined.

Sales for laboratory informatics, a business that's heavily from influenced by pharmaceutical spending were down compared to last year's results. Customer evaluations for our e-Lab notebook product are progressing and feedback continues to be positive. Overall, though, the rate of uptick for this technology continues to be below our expectation we are cautious about near term growth prospects for this product line.

Our TA instrument division business continued to deliver strong results and very impressive sales growth. Overall the division is benefiting from continued expansion of the business within Asia and for the successful launches of new instruments.

On the business development front we continue to evaluate the acquisition of businesses, product lines, and technologies to augment our Waters and TA Instruments operating divisions. In the meantime, we currently to expect to continue to apply our strong cash generation to buying back shares of our stock through the $500 million program authorized by our board in October of 2004.

In summary, with the first quarter behind us, we plan to continue our efforts to grow our business by aggressively marketing our new products and programs. After careful analysis of the factors that contributed to the first quarter's weakness, we believe that the fundamental growth drivers for our business remain intact and looking at our competitor's situation we remain confident that we are well positioned to pursue both technological and market leadership positions within the markets we serve based upon our exciting new products and our strong financial condition.

At this point I'd like to turn it over to John for the financial detail.

Thank you, Doug and good morning.

Earning per diluted share with $0.38 this quarter compared to $0.37 last year before unusual charges, for an increase of 3%. On a GAAP basis which includes a charge for litigation expense in Q1 of 2004, earnings per diluted share were $0.38 this quarter versus $0.33 last year. Sales grew 5% this quarter versus last year on a reported basis and included a 2% benefit from foreign currency translation. Our sales results were heavily impacted by declining sales in Europe and weaker pharmaceutical spending in most geographies. Industrial demand held up fairly well this quarter across LC and thermal analysis markets. Government funded business in China was weak this quarter where we saw a significant slowing of customer orders.

Before I describe sales by product line, I want to discuss a change in our classification of products going forward. To be consistent with how we now manage our business, we will be including single Quadrupole instruments in mass spec sales, and services revenue from both LC and mass spec sales will be recorded within LC sales. Our quarterly and annual reporting will continue to break down sales into product and service components. The dollar amounts moved between the mass spec and LC categories offset each other leaving the relative proportions of our business classified as mass spec and LC unchanged after the move.

Now looking at product line sales in constant currency terms, sales of LC products grew by 2% versus prior year. informatics revenue declined by about $500,000 this quarter. Our mass spectrometry product shipments grew about 5% this period, positively impacted by sales of our new Q-Tof Premier. And our thermal analysis business continued its strong 2004 performance with revenue growth of 18%.

Gross margins improved this quarter by about 40 basis points and came in at 58.3%. This improvement was largely the result of favorable foreign exchange dynamics along with a smaller impact from the continuing success of our manufacturing cost reduction programs.

SG&A expenses increased 13% over Q1 last year. Currency impacted SG&A growth by about 3% this quarter. We have been investing in sales, service, and support personnel in developing geographies and in some instances replacing local distributors with direct personnel which impacted SG&A growth this quarter. Additionally we saw impacts from frond loading of promotional expenses and Sarbanes-Oxley compliance costs this quarter. We have taken actions to reduce SG&A growth in future quarters and will remain cautious about additional spending as we monitor ongoing sales levels.

R&D expenses were up 4 percent as expected this quarter. This quarter's growth rate appears low due to the heavier expenditures early in 2004 related to development efforts in the Acquity and Q-Tof Premier product launches.

Operating margin, excluding unusual items, declined 140 basis points versus prior year as a result of the disparity in the growth of sales versus SG&A. Our respective tax rate for 2005 before any impact from potential repatriation activities is 20% for the quarter and projected full year. Increased production at our Ireland facility lowered our effective tax rate. We are reviewing legislation tasks under the American Jobs Creation Act of 2004 which may allow Waters to repatriate up to $500 million in 2005 at a reduced tax rate. We expect to conclude in this matter in the second or third quarter.

During the first quarter we purchased 3 million shares of our common stock for $148 million against our approved $500 million program. This brings our total purchases to 205 million program to date. with $295 of authorized purchases remaining. We plan to continue our buyback activities at 2005, should there be no significant acquisition opportunities in the [anilocal] instruments and chemistry space.

At quarter's end, outstanding debt totaled $586 million, primarily related to borrowings in the U.S. Cash and short-term investments totaled $587 million. With our strong balance sheet liquid we believe that we have adequate flexibility to fund future share repurchases and potential acquisitions.

Cash flow continues to be very strong with cash from operations of $80 million this quarter. Capital expenditures of $13 million yielded net cash from operations of $67 million for Q1. Accounts receivable sales outstanding stood at 81 days this quarter up 2 days from Q1 last year. Inventories are up $8 million over year end balances, primarily due to late in the quarter sales shortfall.

Turning to our outlook for the remainder of 2005, we expect pharmaceutical spending to improve as the year progresses but to not believe it will meet our original expectations particularly in Europe. In China, we believe that government controls to cool the economy will continue and that overall growth in Asia will be tempered as a result .

The industrial markets continue to look healthy and we believe we will meet our original expectations for growth in this market. As the year progresses, we are confident our Acquity and Q-Tof Premier and our protein Protein Expression System will help us to gain traction as these product placements continue to ramp you. We believe these conditions will allow us to grow organic sales 7 percent in 2005. Currency at today's levels should add approximately 2% to sales growth bringing recorded growth to 9%. Gross margins are expected to improve by 20 to 30 basis points versus 2004 and we are examining our SG&A spending to postpone any new spending that is not revenue generating.

At this time I would estimate SG&A is likely to grow at or slightly above the rate of sales growth for the full year. R&D is likely to grow at the same rate of sales and this should leave operating margin as a percent of sales about equal to 2004 before unusual charges. Continuation of the buyback program should favorably impact the fully diluted average share account count in 2005, providing EPS leverage.

Putting all of this together we expect earnings per diluted share, $2.02 for 2005 with the normal tolerance of $0.03 to $0.06 and before unusual charges. For Q2 we expect sales growth 9% which includes a 2% benefit from foreign exchange. At this sales level we expect earnings per fully diluted share of $0.44 with the normal tolerance of $0.01 to $0.02 for the quarter. Doug?

Thanks, John. Operator, I think now we can open it up for Q&A.

Thank you, sir. [ OPERATOR INSTRUCTIONS ] Our first question comes from Sara Michelmore from S. G. Cowen. You may ask your question.

Thank you. Good morning.

Good morning.

When you went through the mass spec you did talk about the Q-Tof Premier being the positive growth driver there and it being in double digits. Could you give us a sense if it was 10% or 20% or some sort of magnitude, and then it seems to me just based on the math that the Triple Quad business must have been down so if we could get some color there that would be he helpful. Thank you.

Sure, Sara. The overall Q-Tof business was up in the mid-teens. And the Triples business was up about 5, and everything else was down.

Okay. And just as a follow-up on the Triples business, that's a little bit lower than I think were your expectations. Is that a competitive issue, do you think, or was that a market issue?

We think it's all market, Sara. There definitely have been some competitive product introductions, you know, at the Pittsburgh conference and in the earlier part of this year, but we don't really think that that's had a significant impact on our business in the first quarter. And to the extent that there have been other people releasing results, that's very consistent with the kind of overall data that we're seeing. We think that most everything that we're seeing in the first quarter is a market dynamic, and substantially related to slowing pharma spend.

I know you guys have had good sales data. Have there been any improvements in April versus what you saw in the first quarter?

Well, I'm going to give you an answer and then tell you to ignore it, but I'll say that our business has started off better in April than it did in the early part of the year. You would expect that. And it's only three weeks, so it's one fact with not necessarily a lot of truth behind it. Be careful what you do with it. It's better than starting off slower, I'd say, but it's not a lot of data.

Okay. Maybe I can phrase it this way. Were there specific order delays that you guys had expected to be booked in the first quarter that have now been booked in April, or --

Yes. The answer to that is yes. Some specific pharma orders that we had very good reason to believe we were going to get later in the quarter that flipped into this quarter. I can't tell you that that's not a very common occurrence. It's just when you are looking for all of those kinds of events to try to explain something that you didn't see coming, you look at it more closely, but yes, we did have some of those flip into the second quarter.

Great. Thanks. I'll get back in the queue.

Darryl Pardi from Merrill Lynch, you may ask your question.

Good morning. Could you give us the growth rates in HPLC for the instruments chemistry and services?

Yes, we can. John, you want to --

Sure. The instruments were down 3%. Chemistry was up 5, and service about 7

Okay. With the weakness in pharma, are you seeing that across the board or is there a difference between the regulated and unregulated aspects of pharma?

We certainly see it most pronounced in big pharma. If you look at [INAUDIBLE] and life science businesses that includes generics, ethical pharmaceuticals and biotech, most pronounced in large ethical pharmaceutical companies, within there, I would say it's pretty broad based across applications. I don't think we saw it more heavily in discovery versus development versus QAQC

Okay. And just lastly, is there any change in the pricing pressure you're seeing from those customers in Q1 versus Q2 2004?

I would say a large measure no. It's -- you can't say that you couldn't have found several instances where customers were trying to get a little bit better deal at the end of the quarter, but that's the exception rather than the rule. It's not very elastic in this business, and I'd say we're not seeing competitors adopt that low price strategy, particularly aggressively.

Okay. Thanks.

Steven Sellaman of Infinium Capital, you may ask your question.

Thank you very much. I'm just wondering if you can give us a little bit more color on HPLC end markets to the extent that you haven't mentioned them already, which of those end markets are doing well and which ones are suffering a little bit?

Sure. If you look at the results in this quarter, are all in pharma again as I explained that including generics, large pharma, biotech, that business was about flat. Our worldwide business to government agencies was up in the low double digits. University business, worldwide was down in the double digits. And our industrial accounts which include industrial chemical, food and beverage, environmental accounts, were up in the double digits.

And is there any particular difference in those industrial end markets? Any particular areas of strength in industrial that maybe are offsetting parts that might be slowing with the economy?

I'd say we continue to see good results out of food safety applications, food and beverage. I'd say food and safety are -- we think will continue to be very strong growth areas for us. But industrial chemical, the classical industrial chemical accounts, also seem to be on a pretty sustained period of investment, so I'd say that's what we took out of the first quarter and that's been consistent with the last several quarters.

All right. Thank you very much.

Steve Unger, Bear Stearns, you may ask your question.

Hi, good morning. First off, Doug, why do you think that columns and services were weak? I mean isn't that a different budget than the capital budget? And then are you expecting growth to improve?

We are expecting it to improve. We have seen it happen in the past. We think we had a confluence of a number of events. We did have a couple of fewer selling days in the quarter. You also see, particularly in the Asia world, where customers buy a lot of consumables when they buy the system, so if system sales are down, we they are -- they often oftentimes will buy six months or a year's worth of columns at the same time. You also see when you have large customers like this, you know, put on kind of a peanut butter delay or a peanut butter freeze in their spending, they kind of contract on all fronts, and they are just looking at purchase orders and spending, and that can tend to have a contracting effect in any short period of time. We don't think, kind of getting at the heart of your question, we don't think that's likely to be a long-term sustainable dynamic. It did surprise us a little bit that that number wasn't two or three points higher this quarter and we don't look at that as being a long-term problem.

Okay. And then are you expecting then that to be two to three points higher throughout the year?

Yes.

Okay. And then the absolute dollar value of Q-Tof and Acquity sales, could we get that?

No, I don't think we disclosed that.

Right. But what we did disclose was that ACQUITY system sales in total was about $50 million for the quarter. We didn't disclose the Q-Tof number.

Okay. And then in terms of your sales target for 2Q '05, there was some static on the line. I didn't get get that. Could you give us that again?

Yeah. For the second quarter we are looking for about a 9% top line, which includes 2 points of currency, and that will translate to about $0.44 of earnings with the normal $0.01 to $0.02 tolerance

Lastly, on the repatriation of earnings, you mentioned that it was either the second quarter or the third quarter where you would make your decision; is that correct?

Yes.

Why not a harder stop date as to when that decision is made?

Well, we're working through the process of understanding where these monies could be deployed. There needs to be a management plan that's pretty detailed as to the use of funds, so we're washing through that process as quickly as we can, and it's possible that we'll have some news when we talk in July.

Okay. Great. Thank you.

You really want to have belts and suspenders on this. While it looks simple on the face of it , if for any reason you run amiss of these regulations, and the time regulars are relatively new, you don't want to be faced with a huge tax bill here, so we want to be very careful.

Fair enough. Thanks.

Derik deBruin, UBS, you may ask your question.

Hi, good morning. When you look at the ordering patterns in big pharma, are you seeing, I guess, very strong interest from the bench scientists but as the orders move up the chain it's the higher -ups that are cutting the purse strings?

Yes. Cutting the purse strings I think is maybe a little bit too aggressive a term. But there's no question that the people at the bench are crying for new systems and new capabilities. They think they are being held to getting projects done regardless, and they think they are making very strong cases for the kind of equipment that they need, but they are finding that their capital requests are dwelling longer in capital committees or taking longer to get a Vice Presidential sign-off. I can't say we haven't ever seen this before. This is by far the strongest degree we're seeing and the strongest change, as we went from a fourth quarter where we saw actually pretty much looser dynamics to the first quarter with a new year and new budget that things just seem to screw down and get tighter as the quarter went along.

Do you think that some of the spending that you saw last year was related to some of the tax changes around capital spending for some larger companies?

Around the tax repatriation?

Yeah.

I personally don't believe so. I don't think that companies are spending based on where the cash is around the world. I think they are much more focused on their operating performance, and that's establishing budgets for headcounts and that then drives the capital plan. I don't think the repatriation had a measurable effect at all.

Okay. On the protein Protein Expression System, do you have a backlog of orders from early access customers? I guess any [color] you can give us on the order book for the product would be helpful.

Yes. We do have a backlog of orders for the Expression System. Since it's not formally ready for ship, they have to be done very customer by customer basis. And so we're really not trying to take and haven't been trying to take substantial orders because we couldn't deliver it until, you know, this kind of time frame. And now it is also very possible that customers who bought Q-Tof Ps can ultimately upgrade to an Expression System because the Q-Tof P is the heart, or one of the hearts, of the Expression System. So we're -- we continue to get good feedback about it. We think it's going to be a very competitive system. But I'd say it's still going to be another three or four months before I have real hard data for you.

Okay. And one final question. How many of the ACQUITY units are you shipping with mass specs? And I guess just trying to get some color on what the detectors are that are going out, you know, single quads, light scatters, triple quads?

About 30 percent of our ACQUITY sales go attached to a mass mass spectrometry system, and I'd say most of those are higher end mass spec systems as opposed to single quad. Now, most of them also have a UV detector as part of the system, so it's -- but I'd say you should think of that as principally a mass spectrometry system, but many mass spec systems have a UV as part of the system.

Great thank you very much.

John Sullivan, Leerink Swann, you may have your question.

Good morning, guys. Couple of quick ones here. The first one is in your traditional, in the pre-ACQUITY liquid chromatography area, Alliance, et cetera, did you see slower business than you expected among generic drug makers and if so do you have any inclination as to why it might be?

In one specific area we saw a little bit slower business in India than we had anticipated. And most -- much of the India business is generic drug manufacturers, so in that context -- but we frankly think that's a point off line. We are encouraged by our outlook for India and we don't think -- we just think that that was a one-off situation in the first quarter. Other than that, I would say we didn't see any material change in the general tenor of the generic business. I mean, the pharmaceutical weakness was highly concentrated I'd say in large pharma.

Okay. Thank you. My other question is regarding the informatics business there are parts of it that have seen both at Waters and elsewhere to be persistently more sluggish with large pharmaceutical companies than the life science industry has expected. Do you think there are management in the life science business that are re-evaluating inform acts as it's own business unit?

I'm sorry, within pharma of are they evaluating informatics?

No, are life sciences companies re-evaluates potential for informatics as its own business as a stand alone business area do you think?

Well, I think what we call informatics and what maybe bioscience informatics is can be pretty different products and capabilities. What we're really, you know, mean in our informatics product is scientific database management products, a significant piece of that is our capability with our E-lab notebook and the umbrella ring of our chromatography products and our mass spec products into that whole enterprise data management capability. We're not trying to pick out sequences or do autologous matches of D&A characteristics.

What I do think it's very fair to say that we have been more optimistic about the opportunity in informatics than we've delivered. I think a big piece of that is clearly our biggest customer market for this product line is large pharma and we thought we had a product that was just right for the times given regulatory pressure with electronic management and electronic signatures and retrievals, and we thought we are coming to the market with a very good product and capabilities just when they needed it.

It may be that that's true, but it's also hitting when those companies are looking at capital spending for those new areas that they don't have in their base and saying, you know, we've got to wait longer. We need to evaluate more. I can get by without doing this one more quarter. I would say we still feel like there's a need, that we have the right product. We're frustrated by the fact that it's taking longer than we thought it should, but we still think it's a need. We still think it's there, and we're still reasonably confident that this is an important long-term strategic product line for us.

Thanks very much.

Michael Peterson, J.P . Morgan, you may ask your question.

Following up on the question earlier about pull through of mass spec with ACQUITY, do you get the impression that because you have more bundling, that it's the higher ticket prices holding up order conversion or is that that budgets are temporarily frozen?

I don't think ACQUITY in specific is doing it. I think it's more of a general customer dynamic in terms of holding up purchase orders. I do think that ACQUITY continues to -- let me step back a minute. I continue to be very, very optimistic. The feedback that I'm getting from customers is universally good about ACQUITY, and it continues to be almost too good, in that they are really re-evaluating how fast to go with the ACQUITY product line in their key processes, and if anything, I think that may be slowing down ACQUITY still to a level that where as if they were just replacing new systems, they would do it kind of in an easier 1, 2, 3 basis, but a number of our key accounts are looking at major implementations of ACQUITY, and they are trying to figure out how to do it because it's no longer because of just buying a $50,000 system or a $100,000 system. They're looking at substantial procurement for this capability. And if anything, I think that might be slowing down the process, because now, we're no longer talking about single units to systems, we're talking about major conversions.

Okay. Second question, on China, you've said that the government controls are going to lead to weakness throughout the rest of this year. How much visibility do you have there? Is this just kind of a blanket assumption that the rest of the year's going to be weak or do you actually have visibility to know that it's going to last.

I wouldn't say that our visibility is great. Our people on the ground in Asia are perhaps a little more optimistic than we are. This is the first time in a long time that we've seen this kind of slowing we certainly didn't see it last year. We didn't see it in the fourth quarter. But we see enough symptoms of it that we're cautious about how long it's going to take to get through this period. And I'm -- it's hard to cite a specific government official or government publication but we know it when we see it and we saw it in the first quarter.

Okay. And then finally are you hearing anything out of Fizer since they announced this restructuring initiative and pushed towards vendor consolidation?

I think we we hear kind of the same things that you hear, that they are putting their eggs in a row and trying to get major cost reductions. The focus has not been on R&D. The focus from Fizer has been on their SG&A from their public pronouncements. I'd say we continue to have very good strategic discussions with almost all of the large pharmaceutical accounts including Fizer, and I think we still have a good opportunity to grow our business for the rest of this year.

Great. Thank you very much

Annette Kahanna, Argus Partners, you may ask your question. Please check your mute.

Is there anyone else in the queue, operator?

Yes, sir. One moment. Steven Sellaman Infinium Capital you may ask your question.

Just a couple of follow-ups on comments you've made. You mentioned there are a couple fewer selling days in the quarter, presumably you're referring to Easter. To what degree did that effect revenue was that 1 or 2% or is it not measurable and secondly you're saying that people are taking time to assess how big an ACQUITY purchase they might make. Do you have a sense of the timing on some of those big decisions?

Sure. In terms of ACQUITY, I thought they would be a little further ahead today than they are. I think unfortunately, that this overall dynamic on pharma budgets is probably impacted on their ability to move something like that forward. So I think -- it's in process. We have had these sessions with too many large companies to know that they are not working on it. I'd say it depends at the pace that if they can move some of these capital budgets along. I would say my best judgment is that it's probably the second half of this year. I wouldn't surprise me if they kept with this sluggish pattern for this quarter. And began to loosen the purse strings more in the second half.

And in terms of the calendar dynamics, you know, this kind of dynamic has a measurable impact on service and consumables, you know, that's probably a percent or two. It's very hard to tell what the impact is on instruments because selling days doesn't have as directly comparable a result, so I'd say it's a small effect, you know, 1 or 2% on consumables and service and, you know, I can't tell you what it is on instruments.

Okay. Thank you.

Tony Butler, Lehman Brothers, you may ask your question.

Thank you. Good morning. Doug, this is back to the comment on columns and services you made and observation that you're expecting that to improve, but can you comment on the demand of columns and services ex-U.S., particularly in Europe, because I guess if it were down, I still struggle with the observation that you're making that you believe that CapEx spending should be improved at least from the pharma customers in Europe within the second quarter. Maybe that's for the remaining part of the year. Thanks very much.

Yes. Tony, consumable spending was up in Europe in the quarter. It was up in the single digits, so it's -- it was materially better than the instrument piece of the business, but still, you know, below budget. But for all the reasons I cited, we think that gets better post the first quarter. And the second part of your question?

That was really it. But I did have a follow-up, if I may. Do you find that the same customer in the U.S. is actually having differential spending in the U.S., that is spending more in the U.S. and appreciably less non-U.S. than you have in the past? Is that the answer to part of this dilemma?

Well, I -- the same customer, I would say we continue to hear and see accounts favor investments outside of Europe rather than inside of Europe, as a general dynamic. That's not to say that various large accounts who have significant presences in Europe aren't investing in Europe. They are, and we continue to service and support those, but some very well known accounts are investing in the U.S. companies like Novartis, are not investing nearly as much in Switzerland as we they are in the United States, and that's a change in the last couple of years versus prior periods. Some of the British pharmaceutical companies are on record as moving clinicals into Eastern Europe, Poland and India.

And how big that is today, we can't measure that really well. I think it's just starting, frankly. But it is something clearly that we see more activity in that area, and I believe it.

I believe these companies are no different than you or I would do in the circumstances. The conditions in Europe are hard. Rates are higher. Labor costs are higher. Cost of doing clinicals are higher. They are going to look for better and more effective ways to spend their money and I think that's going to be a continuing situation over time.

Thank you, Doug.

Larry Neibor, Robert Baird, you may ask your question.

Thank you. Good morning.

Good morning, Larry.

After going back to your customers to review what's going on, what type of capital budget increase are they looking although for this year? What number are you basing your forecast on?

Well, you know, generally I would say that the feedback we're getting is that they are going to spend a similar amount in overall capital in 2005 as they spent in 2004. Now, that doesn't help you a heck of a lot in terms of where they are spending their capital. It just tells you that they don't think that they are going to face substantial cuts in their capital spending in 2005 versus 2004. And I think it's not materially different from what they were telling us in various parts of last year. The slowdown in the first quarter is worse than we saw last year, but we certainly did see a slow period in the first six months last year that picked up as we went through the second half of the year. So I'd say that's the general tone that we get and -- that's a mix of people at the bench level and people at the executive level.

If you don't see a recovery in the pharmaceutical customer segment over the course of the year, what would your organic growth for the year be in that situation?

If we don't see a -- you mean if we see the conditions largely as they exist in the first quarter?

Yes.

I think you would see pretty much the kind of revenue growth that we saw in the first quarter.

You could still argue, Larry, that perhaps there's so I still some back end loading of budgets even at a reduced level, so it's possible that even in a worse environment, that normal forecasting, the back half looks a little better.

Thank you.

[ OPERATOR INSTRUCTIONS ]. Chris Arndt, Select Equity Group, you may ask your question.

John I was wondering if you could comment on your forecast on SG&A as a percentage of sales. I thought you mentioned that for the year as a whole it might be equivalent to 2004 or perhaps slightly higher. And I guess that would imply as a percentage of sales in the second, third and fourth quarter it might be below where it was last year. Is that correct?

For the second quarter I don't believe that that's the case. I think in the second quarter we are more likely to see a more elevated level of SG&A spend, but as we go through the year in the second half, I think your comment is correct. Certainly as we came into this year, we had somewhat higher expectations and while we're a little cautious right now, we're not doing anything to pull significant amounts of run rate cost out of the business. We're certainly tempering our appetite to add headcount going forward. So it is a little bit of an unusual year when we grow SG&A so close to sales.

Okay. So your expectation is to I guess simply constrain the absolute dollars of spending that you're at now and with the idea that if you get higher sequential sales in the back half of the year, then you'll see the leverage on it?

Yes.

Okay. Thanks a lot.

Okay.

At this time there are no further questions.

Okay. Thank you all for being on the call and we look forward to talking to you next quarter. Thank you.