Waters Corp (WAT) 2008 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 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. Good morning, and welcome to the Waters Corporation first quarter financial results call. With me on today's call is John Ornell, the Waters Chief Financial Officer. As is our normal practice, I will start with an overview of the quarter's highlights and then John will follow with some details on our financial results, and then provide you with our outlook for the second quarter and then for the full year. But before we get going, 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, Q2 and full-year 2008.

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 and contingencies that could cause our actual performance to differ significantly from our present expectations, see our 10-K Annual Report for the fiscal year ending December 31, 2007, part one 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 don't 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 2008.

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 measures is attached to the Company's earnings release issued this morning. Our discussions of the results of operations we may refer to pro forma results, which exclude the impact of purchased intangible amortization and retirement plan transition changes.

Thank you, John. Overall, I have to say I'm pleased with our financial results in the first quarter that has been for many companies one of the most difficult quarters in a number of years. With 12% revenue growth, 23% earnings per share growth and over $100 million in free cash flow generated, I think it's hard to characterize our results as anything but very good.

Examining the quarter's results a little more closely to better understand these results, our organic growth rate in the first quarter did come in lighter than we expected as we did see some delays in spending from many of our pharmaceutical accounts and continued weakness in our Japanese business. Qualitatively, these trends were consistent with the market dynamics that we talked about in our January call. However, weaknesses in these segments were, in fact, a little more significant than we had envisioned and accounted for the lion's share of the variation in organic sales results from our expectations.

Looking at our pharmaceutical accounts, sales in Europe were less than our forecast, especially for high-end research instrument systems. Discussions with both our customers and our management staff in Europe suggests that much of the weakness is associated with order delays and that business momentum should improve throughout the year.

Our market segments within Europe outside of pharmaceutical performed in line with our expectation. Growth in Eastern Europe continues to be strong. In North America, sales to a handful of drug firms were also soft and contributed to a flattish year-over-year performance. Year 2 we expect that order rates will pick up throughout the year.

Pharmaceutical accounts outside of our top 15 to 20 accounts, including generics, CROs and biotech companies, demonstrated good sales growth and allowed us to grow our overall pharmaceutical sales in the quarter. In addition, and as we have seen the past two quarters, sales to the drug industry in Asia have been a significant driver for the entire pharmaceutical sector.

Looking forward to the remainder of 2008, we are cautiously optimistic that our pharma business will improve. Already, we have seen increased order activity in the opening weeks of the second quarter and some indications that some of our historically largest accounts, ones that have been particularly conservative during the past couple of years, may be ready to accelerate their spending.

Looking at instrument product lines within the Waters division, sales for most categories grew at similar rates during the quarter with research-related systems seeing a little more softness than systems for more routine testing applications. Our business in Asia outside of Japan continued to be a strong double-digit growth trajectory.

Pharmaceutical demand was strong in India and China as outsourcing from the developed world continues and more large western firms expand their footprint in the region. We believe that we will continue to see strong growth here the rest of the year.

In Japan, we continue to weather a combination of soft market conditions and a difficult base quarter comparison. But we expect economic conditions in Japan to remain at best uncertain. More favorable quarterly comparisons as we move through 2008 will help us offset market weakness.

In the first quarter, we grew our recurring revenues at a slower than typical rate. The issues already mentioned in Japan along with some logistical factors specific to the quarter account for most of the shortfall. However, we're very confident that the first quarter's results is somewhat of an aberration and that growth rates for our recurring revenues will rebound during the year.

Looking at TA Instruments, we're very pleased with the first quarter's results. During the quarter, the division was able to grow its newly acquired microcalorimetry business while driving geographically balanced growth for its core thermal and rheology lines. The first quarter's results do not yet reflect the positive impact of new research grade rheometers that we plan to begin shipping later this quarter. We are expecting another strong year from TA Instruments this year.

Moving down the P&L, it's clear to see operational improvements throughout the business. Our efforts to reduce manufacturing costs have improved our gross margins while expense controls have allowed us to leverage our spending. We believe that we'll continue to see year-over-year improvements as we move through 2008.

On the manufacturing front, we plan to increase production levels of chromatography instrumentation in Singapore this year. Higher production volumes in Singapore will allow us to reduce manufacturing costs further as well as providing additional tax benefits. John will be walking you through other P&L details.

I wanted to comment on our strong cash flow in the first quarter and reemphasize the priority we place on this important metric. During the quarter and before funding the transition from a defined benefit retirement plan for a 401k plan, we generated a little over $100 million in free cash flow, which represents, by the way, 27% of sales.

This level of cash generation is indicative of the operational efficiency of our business and provides us with significant flexibility to strengthen our business going forward. Throughout the first quarter, we aggressively acted on a share repurchase program and looking at our investment plans for 2008, you should expect this to continue to seek acquisition opportunities, likely similar in size as we've completed over the past couple of years, and for us to deploy the balance of our cash flow to our share repurchase plan.

Finally, looking at our EPS growth for the first quarter, I think it clearly shows that we demonstrated an ability to manage our operations and our balance sheet to maximize our returns. As we move through 2008, we plan to fully fund our key product development program and expand our sales and support organizations in growth markets while closely managing our spending.

In closing, I would like to note that we feel we have a very strong new product pipeline and are prepared and well-positioned to aggressively and profitably expand our market position. I would like to turn it over to John.

Thank you, Doug. Our first quarter results delivered 12% sales growth and 23% growth in non-GAAP earnings per diluted share. Earnings per share were $0.69 this quarter compared to earnings of $0.56 last year. On a GAAP basis, our earnings were $0.67 this quarter compared to $0.54 last year. The reconciliation of our GAAP to non-GAAP earnings is included in our press release issued this morning.

Sales grew by 12% this quarter with currency providing 6 percentage points of growth. Looking at corporate sales growth regionally and before foreign currency effects, sales within the U.S. and Europe were impacted by a sluggish start to the year at several of our top pharma accounts. Sales within the U.S. were up 9% this quarter and within Europe, sales were down about 2% before currency effects. Sales within Japan remain soft and were down by 9% while sales in Asia outside of Japan remain strong and were up 27%.

Turning to the product front within the Waters division, instrument systems grew by 5%. Our service business grew by 7% and chemistry had a 3% growth rate. Our TA Instruments division had another strong year with sales up 12% versus prior year, resulting from strong new product sales.

Now I would like to comment on non-GAAP margins and expenses excluding items noted in this morning's press release. Gross margin came in better than expected at 58.2% this quarter. Versus prior year, margins expanded by about 150 basis points. This quarter, we had the benefit of new product cost reductions, favorable product mix, and currency translation was favorable as well, given a strengthening yen and euro combined with a relatively flat British pound.

SG&A expenses grew by about 13% this quarter compared to prior year and were heavily influenced by currency translation. R&D expenses grew by 6%. The Company's effective tax rate this quarter was 18.6%, which is generally consistent with our initial expectations. This rate is slightly above our 2007 tax rate due to higher profits in our euro denominated entities, which will have higher profits this year at current exchange rates.

On the stock buyback front, we continue to purchase our shares in the open market and during the first quarter, we purchased 1.3 million shares of our common stock for $75 million. The fully diluted share count was 102 million shares for the quarter.

On the balance sheet, cash and short-term investments totaled $759 million and debt totaled $929 million bringing us to a net debt position of about $170 million. In the quarter, we closed on a new additional committed term loan facility of $150 million, which provides us with additional access to capital and financial flexibility.

We measure free cash flow as cash from operations, less capital expenditures plus any non-cash tax benefit from FAS 123(R) accounting and excluding unusual non-recurring items. In the quarter, free cash flow hit a record $100 million after funding $14 million in Cap Ex and adding back $6 million of FAS 123(R), tax benefits and excluding a $12 million payment associated with the transition of pension plan to a 401k plan in the U.S.. Comparable free cash flow in Q1 last year was $78 million.

Accounts receivable day sales outstanding stood at 78 days this quarter, up one day from Q1 last year. Without currency effects, DSO improved by three days versus the prior year. And inventories increased by $21 million this quarter with currency translation comprising about $7 million of this increase.

Now I would like to turn to our outlook for the remainder of 2008. Given the slower top-line start to the year we experienced with our large pharma customers and the more difficult economic environment in Japan, we believe that a reasonable expectation for sales growth in 2008 would be somewhere in the range of 6% to 8% for organic sales for the full year.

Currency at today's levels should add at least 4% to growth this year bringing our overall growth rate to 10% to 12%. Moving down the P&L, for the full year, we expect gross margins to improve by about 100 basis points as a result of improved production efficiencies on higher volumes of acuity products, favorable mass spec sales mix that contains more high-end mass spec system sales, favorable product cost reductions, and favorable foreign currency translation benefits.

Operating expenses are expected to grow at a rate about equal to sales. As the year progresses, we will moderate our spending on additional resources to keep our expense growth aligned with actual sales volumes. We expect our tax rate about to be about 18.6% for 2008, and net interest expense is expected to be in the neighborhood of $20 million. Our fully diluted outstanding shares are currently estimated to be about 101 million shares for the full year.

Rolling all of this together, we currently expect non-GAAP earnings per fully diluted share to be in the range of $3.20 to $3.30 per share where sales growth is between 10% and 12%. For Q2, we expect sales growth of 11% to 13%. Gross margins should continue to see significant improvements versus prior year and operating expenses are expected to grow at a rate comparable to sales. Earnings per fully diluted share are expected to be between $0.69 and $0.73 for the second quarter. Doug?

Thank you, John, and at this point, operator, I think we can open it up for Q&A.

Thank you. (OPERATOR INSTRUCTIONS) One moment, please. Ross Muken with Deutsche Bank.

Good morning, gentlemen.

Morning.

Can you talk a bit about the delays we saw in the pharma side, both U.S. and Europe, and was that a trend that we saw sort of throughout the entire quarter where it was just sort of general weakness or do we see a pick up to the end of Q1 that led us to believe that Q2 would be a bit more robust than what we saw from a demand perspective this quarter?

Russ, I would say we saw a pretty consistent across the big pharma universe in terms of what the actual results turned out to be in the first quarter.

On the other hand, we saw continual optimism from those accounts in terms of what they were likely to do. They didn't spend as optimistically as they talked on balance, but if you look at early indicators and then you look at some subsequent events as to what we started off the second quarter, I think on balance that is a net positive that there continues to be very high quote activity and there continues to be some late blossoming real business out of those accounts.

So, it's not absolutely total. We saw some large accounts actually spend pretty significantly in the quarter, but the general response was low spending by big pharma in the first quarter. But I'd say the net overall dynamics seems to be pretty positive moving into the rest of the year.

That is a tough call and that is what we try to temper in our outlook of walking that balance between what we saw in the first quarter and expectations for the rest of the year. I'd say coming at this point we're cautiously optimistic that we going to see better performance out of pharma for the rest of the year.

In terms of the balance of demand for Acuity versus and Alliance, how would you characterize that in terms of where the weakness was coming from?

We had another good Acuity quarter. I wouldn't say that there is any sign that, you know, Acuity penetration is slowing down. But overall, I would say that you did see a better mix of Alliance and Acuity in the quarter and that, in some of those traditional Asian pharma accounts that are more weighted toward Alliance than Acuity.

And, John, on the gross margin, it seemed like that was a little bit better than we were looking for in terms of the improvement you saw and what you're guiding for for the rest of the year.

Yes.

Is it a function solely of the weakening pound versus the dollar or is it also sort of more manufacturing efficiencies that you're getting out of the move to Singapore than maybe you anticipated when you first guided for the year?

Yes, I'd say, certainly we did have favorable manufacturing variances. Some of our cost reductions that we had planned for the year were actually implemented earlier than budgeted.

Our manufacturing spend was under plan and we had some favorable variances through manufacturing volumes in the quarter. We built a little bit more, obviously, than we anticipated in the quarter versus sales. Our service margins actually were up in the quarter as we have held back a little bit on spend on that side and had some favorable mix on (inaudible) plans.

I would say product mix was different than we had originally thought as Doug alluded to. A little bit higher volume of Alliance and vis-a-vis Acuity. On the mass spec front we suffered a bit more on the low end singles which is more research in its orientation, so the service mix was favorable for us and, yes, currency had an impact as well.

You're right, the euro was up 15%. The yen was up 13% and the pound was relatively flat. It's the opposite situation that we saw as we came into the year last year.

And one quick maintenance question on the share repurchase.

Yes.

How many shares did you actually repurchase during the quarter and what do you have left on the authorization if anything?

We purchased 1.3 million shares in the quarter and we have, I think, about $250 or so million left on the $500 million program. We have significant amount remaining in the program.

Okay. Perfect. Thanks, guys.

You're welcome.

Quintin Lai with Robert W. Baird.

Hi, good morning. When you looked at some of the change in big pharma spending and you said it looked like it's picking up here at the start of the quarter, I guess how do you manage your inventory in case it either goes up or down from current expectations?

Well, we do it probably pretty much the way everybody, does Quintin.

We look at the most recent results in our inventory, whatever the balances are now, factors into the production plan the next two quarters, and since we entered the quarter with a little more inventory than we originally planned, we'll take down production plans in those specific product lines over the next two quarters, and we factor in our forecast for the full product complement over the next two quarters.

Obviously, there is a lot of science and a little art to that. But you can expect that our production plan for the next two quarters has been revised a little down from our original expectations for the year.

And then, I guess, so you said that the optimism is somewhat there. What changed from, I guess, the first quarter and the delays of spending to now were you starting to see a pick up?

Well, I would say throughout the first quarter while the actual order rate was lower than we had originally budgeted, the response from most of those accounts was still pretty optimistic. And so you always worry about what is coming through that request for a quotation, attendance at seminars, because it can be a leading indicator, it can be a false indicator. So I would say we continued to see very real interest from those large accounts.

But, of course, we're reading the same things that you are about a number of those accounts facing difficult times. Now, whether those difficult times mean that they will significantly cut back on strategic R&D programs or not, we continue to believe that that is not the end result in this industry.

That they have got to continue to focus on development programs, at least the industry as a whole does, while individual accounts may face their own bumps and peaks and valleys.

So, all I'm saying is that what we've seen is a continuation of interest on those accounts. A number of the large tenders that we thought we would get, some of those have come through as we started out the quarter. We continue to get a lot of interest on the part of that broad group of customers, and I would say the net result of all of that is that we're a little bit more optimistic about going into the second quarter than the results we saw in the first quarter.

Last question, I will jump back into the queue. Is it possible to decouple, I guess, big pharma specific spending versus sale cycle and competitive dynamics? Has anything changed as -- from the competitive landscape that would lengthen out a sales cycle?

No, I understand it's a fair question to ask what we're seeing on the competitive front, but I -- we're not -- none of what we saw in the first quarter was the result of any substantial losses that we saw in those accounts. I would say overwhelmingly it's delays versus lost business. We're not seeing any competitive thrusts, particularly against things like Acuity, particularly in things like the high-end research grade mass spectrometers. If anything, I'd say we're even more confident about our strategic positions technologically. So, I am not -- I'm not seeing any significant penetration in our traditional dominant accounts.

Thank you.

Tycho Peterson with JPMorgan.

Hi, good morning. Doug, I wondered if you can talk about the academic market. We've seen some mixed signals there, as well. If can you give us a sense as to what you are hearing from your academic customers that would be helpful.

Sure. Maybe, John, you can specifically cite the --

Yes, I think as we look at Waters in total and we look at the university business, it's -- it's flattish and if we look at it geographically, it's down a little bit in Japan. I would say that it's not something we expect to see for the full year. U.S. was down very little and I would say it's a rather small piece of our business overall, but it was not contributing to the growth in the first quarter.

Okay. And then as we think about the product cycles here, can you give us a sense coming out of Pittcon what the level of excitement might be around the new Synapt MS in terms of going after a slightly lower price point here and a different value proposition for your customers?

The customer response has been very good. I think that they're very enthusiastic about not being able to get into Synapt technology as a beginning point and then upgrade to full high definition subsequently. I'd still say that high end market was the one that was delayed more than we had anticipated in the first quarter, and I would say we didn't see lost business but we saw that impacted by delays to a significant extent.

Okay, and then, Doug, in your prepared comments you had mentioned, I guess, the logistical factors in regards to the recurring revenues. Can you elaborate on specifically what that was?

Yes, sure. I must admit we probably could have anticipated a little bit more of that. Starting out the quarter the way January developed, the first week of the quarter, some of its calendar, some of it just may be the way our large accounts started off the year.

We saw almost across geographies what I would characterize as calendar delays. Easter falling in the first quarter affected us to an extend that we now pretty clearly understand, and just as we enter into the second quarter, again, in that run rate business, you see it dramatically different starting off the second quarter than where it started off the first. Again, for no apparent reason other than what we grossly call calendar effects. So we think it's clearly affected the run rate and the service and chemistry business.

We're pretty confident that that is an unusual dynamic. We're not seeing any of that as we move through the second quarter.

Okay. Thank you very much.

Jonathan Groberg with Merrill Lynch.

Hi, good morning. Thanks for taking the call.

Good morning.

Hi, Jonathan.

Can you just -- as I look at the numbers geographically that you gave again, the U.S. seemed to be okay, you said plus 9% and it seems like really we know some of the issues going in Japan. But Europe seemed to be the one that was more sluggish at 10%. Can you elaborate on what explanation you're hearing from customers, what your sales people are telling you is going on there?

Yes, I would say most of the -- you're right. Western Europe was lower than our expectations and it's one of the question marks as we view the rest of the year. It was principally a pharmaceutical dynamic in western Europe. Of course, this is all on standard currency terms or local currency terms. Translated, it's obviously grew significantly better.

I would say it was mostly a pharmaceutical dynamic, mostly a larger pharma dynamic. Again, we're seeing anticipated better results as we enter the second quarter. We're seeing some pretty tangible signs of that. It sounds like an old record, but a lot of these accounts every year are starting off slower and slower.

We think it takes them longer to get their budgets booked. They wait longer in the year before they release some of their more significant investments. That seems to be happening as we're speaking. Again, that is one of the reasons why we're a little more confident as we proceed through the year.

Is there any sense that after two strong years overall for your Company and better in some of the European markets, is there a sense that people are trying to go and get certain things approved and they're saying why do we -- we've just invested in a number of mass specs or a number of HPLC, UPLCs, maybe this money would be better spent elsewhere? I'm just curious if there is a bit of a product cycle?

I would say we don't see any sign of that, Jonathan. If you look at where you might look for that quote levels, attendance at our seminars, the kind of less tangible than just simply order rate indicators, we're seeing very robust interest. We're seeing very good, continuing interest in the new technologies and the new products.

So we don't see any of those signs. Mostly what we hear is delayed budgets is the reason for procurement. Now, again, we saw some accounts spend pretty robustly, but the net effect of all of that was not what we had hoped.

Okay. And then, again, going back to the guidance you gave at the beginning of the year, and then revenues that were lower and currency adjustments weren't that much, just a percent lower, but organically lower, can you you talk about some of the things you did intraquarter to deliver on the earnings you talked about?

Did you realize halfway through the quarter that, hey, maybe the organic sales was not going to be quite what we thought and you, you did some things intraquarter to make sure that you could deliver the strong free cash flow and earnings? Again, I'm taking the guidance what you're expecting for gross margins and operating expenses.

Sure, we were -- we tried to draw in our internal forecast and our external forecast somewhat a middle line of between possible performance and realistic performance. We -- in the first quarter, we obviously had trouble hitting that organic top-line that we had anticipated. But I would say we always try to have something in reserve to more significantly increase our bottom-line leverage. So we're not that different from a lot of companies, and we're keeping a little in reserve until we get through the quarter to see whether we release our total spending budget.

So, we released less as it became a little clearer to us that we were going to have trouble making the top line. We try our [damnedest,] of course, to motivate the sales force and motivate the whole organization to bring those orders in so we can get them shipped.

But this quarter, we were unable to get all the way to the top and we had some clear geographical areas where it was more of an issue than in others. And as we book our budgets on the gross margin front, we always have a number of programs that if they all hit are going to deliver a better performance. In some quarters, two out of three hit and sometimes three out of three hit.

I would say this quarter we saw a very good performance out of those manufacturing programs and the good part about that is they will continue to keep contributing for the rest of the year and we're confident about that. So, I don't think, it's all on the margin, I would say, that the spending on the margin, we held up in anticipation that maybe that top line was going to be difficult to hit.

The margin programs kicked in, more three out of three than two out of three. The mix was a little bit favorable to us because of the Alliance/Acuity mix. In currency, it was a little bit better because of the way the pound and the euro and the dollar all came together. So I think the good part about that is almost all of those should be continuing for the rest of the year.

Great, thanks. I was just trying to understand the leverage you have to pull. I appreciate that.

The last question, have -- can you, John or Doug, maybe explain why you raised the debt and maybe give me a feel as to what you're paying on average for your debt versus what you're receiving on cash? Maybe a lot of your cash is overseas in Europe so you're getting higher rates than you were expecting --

That's right. We had an opportunity when we put the original revolver in place to go back and up that with the banks in the consortium and we had talked about beginning that process at the tail end of last year. We executed that in a very difficult environment in the first quarter and got that done on terms that are very similar to the original agreement. We're currently paying about LIBOR plus 60 or so basis points on the debt, and you're right, most of our currency is invested overseas.

On the investment.

On the investment side. Right.

There is probably a 60 or 70-basis-point differential between debt costs and interest that we're receiving on our investments net. Obviously, our investments are incredibly conservative in this day and age. No SIVs or CDOs or anything like. We've got very safe AAA investments on cash invested.

Thanks.

Yes.

Derik De Bruin with UBS.

Hi, good morning.

Good morning, Derik.

Correct me if i'm wrong, but you basically had a one-point or a little bit more than that tailwind to organic growth from 4Q, Synapt sales have basically been shipped since 4Q.

Given with this tailwind and only a 9% organic growth comp, again, up against 1Q '07, why are you confident you can hit your implied organic growth number of 7% to 9% in 2Q when you're facing a much more difficult 13% organic comp? I just basically know it's like why isn't this a repeat of 2005?

If you look at the guidance we gave for the second quarter, it's likely to have 5 to 6 points of currency again, depending on volume in Europe.

So, we're looking for perhaps 6% to 7% organic growth in the second quarter, so comparable growth, I would say, to what we saw in the first quarter and that, yes, it's up against a more difficult base of comparison. But as Doug said, as we look at the business that we've transacted to start the quarter, we're very comfortable that we see improvements in western Europe, we're seeing improvements in our chemistry and service businesses.

So I think we end up in the second quarter feeling better, actually, as we sit here today on the call than where we were in the first quarter. So I don't, I think the base of comparison is completely accounted for in the 11% to 13% top line, given where currency is today.

Okay. When you talk about having more confidence, is your feeling coming from the pharma purchasing managers or is it coming from the people at the lab bench? We have seen it in the past where scientists certainly might want to buy instruments, but then the purchasing managers put the clamp down on the spending. I guess where is your level of confidence coming in from that, from your leads there?

Well, I would say we're not confident enough to take our expectations up significantly over what we saw in the first quarter. I would say that it's -- but I would say our organization probably feels more confident right now than John and I are willing to bank in our formal financial forecast.

But it is true that we're seeing tangible results out of that marketplace that right now, you would have to say are probably better than John and I are willing to take to the bank totally. So that condition didn't manifest itself in the first quarter.

So far, it looks like it might in the second quarter and then we very well could be back here saying that the organization was [righter] than we were. It's early to tell, indications are positive right now but we have a long way to go, and we're comfortable with where we are positioning things right now.

Great, thank you.

John Sullivan with Leerink Swann.

Hey, guys, good morning.

Good morning, John.

A couple of quick ones. One bright point in the fourth quarter were some multisystem orders of Acuity that you saw and then in the first quarter you have just seen a little bit of a shift toward Alliance. Do you think these data points are linked and can you comment on what the right mix between Alliance and Acuity should be expected to be going forward?

No, I don't really think they're linked, John. I think the first quarter is kind of a different animal from the fourth and I think we just saw a level of beginning of the year conservatism. I mean you have seen the struggles that a number of these accounts have had and I think they started off the year conservatively. Whether they will continue or not is a fair question.

We haven't seen any reduced interest in Acuity on the part of these strategic accounts. But at the same time, a lot of our stronghold areas with Alliance in the QC area particularly in Asia have held up very well. So you see kind of a natural effect of that in the first quarter that I don't think is something that you will necessarily see second, third and fourth quarter.

And just on that, are you still confident that over a longer period of time you will see Alliance? I am sorry, you will see Acuity migrate more into the pharma QA/QC setting?

Yes.

Okay. And then, lastly, regarding your mass spectrometry business and triple quad, specifically, there are some reports of more competition and specifically more price competition in triple quad mass spec, but you're still confident you're not seeing that as a primary driver?

Yes, our triple quad business was pretty good in the quarter. It's always been a competitive area, John. I would say that it's probably the most competitive area in the mass spec world.

I would say that we feel pretty good about our array of weapons as we move through 2008. So, yes, it's fair to say it's competitive, but I don't see it as more competitive right now than it has been in the near past and if anything, I think we're likely to strengthen that position moving forward.

Thanks so much.

Tycho Peterson with JPMorgan.

Hi, thanks for taking a follow-up. Just, John, if you can give a little bit more color on the contributions to margins. I know you talked earlier about the currency impact. Of the three factors you highlighted, product cost reduction, favorable mix and the currency translation, can you give us a sense as to how those all factored into the margin improvement?

Yes, I would say if we look at the, first, the manufacturing pieces, they have lower manufacturing spend in the quarter as we have kind of held some head counts open knowing what is coming with some product transfers. We've had accelerated cost reductions and we've had improved service margins on the cost base there. Maybe that is approaching a third of the improvement.

Product mix as we look at the Alliance versus Acuity. We look at the the low-end mass spec not doing as well as the tops and triples on providing some favorable mix. That's probably, maybe that is a third, maybe not approaching a third, but somewhere near that.

And then the remainder is currency, that's probably a strong third particularly given the year-over-year comparison where last year, as you might recall, in the first quarter we had a very strong pound versus other currencies whereas this year, it is completely reversed and the pound is relatively flat and the yen and euro are up.

So pretty consistent into, consistent amounts across, I would say, those three buckets and you will see much of that continue as we make our way into the second quarter.

Okay, and then to clarify, in Doug's comment earlier about Alliance doing well in Asia, the idea is that may not carry through and has a favorable impact on margins going forward, is that right?

We continue to expect Alliance to continue to do well, but relatively, going into the second, third and fourth quarter, it may not have the same --

Right. And as we look forward, we're not expecting the full 150-basis-point improvement year-over-year as mix does somewhat change a bit but we're still predicting a 100 basis points as we look at the next couple of quarters here.

Okay, and then finally, just any incremental data points you can highlight on the other businesses, food, beverage, environmental, anything we should be thinking about in terms of drivers here?

I would say that of note is the interest in environmental and food safety applications particularly in Asia. Boy we're seeing groups of interested Asian customers come through our Milford headquarters and looking across the product lines.

Looking at data, looking at mass spec, looking at UPLC. A huge amount of interest and I would say that is probably the most interesting aspect. It's also true that we're seeing interest in North America, but I would say it's overwhelmed by the amount of interest coming out of Asia.

And when you're talking about Asia, is it coming out of the China export market or the import market in Japan?

I'd say it's notable in China, it's notable in other, I'd say, non-Japanese/Asian markets, including Korea and Taiwan. Japan, we had a pretty strong base of food safety systems in the Japan business last year. That was almost sure to stop at the rate.

We didn't think it was going to stop quite as fast as it did, so I think that is significant just in the quarter-to-quarter dynamics that we saw in the first quarter. Overall, Japan has been a very strong performer for us over a number of years and I think as we move through the current period and work off those base, we'll see Japan's results turn into more normalized growth.

Okay. Great. Thanks for taking the follow-up questions.

[Steven Salomon] with the [Roslyn Advisor].

Hello, John, I was just wondering if you could possibly quantify the calendar Easter effect? How big of an impact do you think that might have had on sales? I know it's a bit of guess work.

Yes, I think it was probably 2 to 3 percentage points of impact would be my guess, and I would also say if you look at some of the large pharma, the slow start that we had there had an impact, too, in the chemistry side of the business. Could have been a couple of points as well. As Doug has said, as we started the second quarter we saw that come back with a vengeance. I think on a full-year basis, we're probably going to be quite happy with the chemistry results.

So it's possible that 2% to 3% is just shifted into the second quarter due to calendar?

Yes.

Okay, thank you.

Sure.

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