Waters Corp (WAT) 2012 Q1 法說會逐字稿

Good morning. Welcome to Waters Corporation first-quarter 2012 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. (Operator Instructions).

I would like to introduce you to 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 conference call. With me on today's call as usual is John Ornell, the Waters Chief Financial Officer; Art Caputo, the President of the Waters Division; and Gene Cassis, Vice President of Investor Relations.

As is our normal practice, I will start with an overview of the quarter's results and John will follow with details of our financials and provide you with our outlook for the second quarter and for the full year. But before we get going, I would like John to cover the cautionary language.

On this call, we may make forward-looking statements regarding future events including statements regarding customer acceptance of our new products, international expansion of our business, spending by certain end markets that involve a number of risks and uncertainties. For this purpose any statements that are not statements of historical fact may be deemed forward-looking statements.

The Company's actual future results may differ significantly from the results discussed in the forward-looking statements on this call for a variety of reasons including without limitation the impact of demand among the Company's various market sectors from economic, sovereign, and political uncertainties; increased regulatory burdens from the Company's business as the Company's business evolves especially with respect to the US Securities and Exchange Commission, US Food and Drug Administration, the Environmental Protection Agency, among others; shifts in taxable income in jurisdictions with different tax rates; the outcome of tax examinations or changes in respective country legislation affecting the Company's effective tax rate; the ability to access capital and maintain liquidity in volatile financial market conditions; the timing of fluctuations in capital expenditures by the Company's customers spanning multiple quarters and years in particular pharmaceutical companies, governments, and universities; the ability to sustain and enhance service and consumable demand by the Company's installed base of instruments; and production of competing products by other companies and loss of market share, pressures on prices from competitors and customers; regulatory economic and competitive obstacles for new product introductions; and other changes in demand from the effect of mergers and acquisitions by the Company's customers; environmental and logistical obstacles affecting the distribution of products; risks associated with lawsuits and other legal actions particularly involving claims for infringement of patents and intellectual property; foreign exchange fluctuations potentially affecting translation of the Company's future, non-US operating results.

Such factors and others are discussed more fully in the section entitled risk factors of the Company's annual report on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission, which risk factors discussion is incorporated by reference on this call. The forward-looking statements included in this call represent the Company's estimates or views as of the date of this release and should not be relied upon as representing the Company's estimates or views as of any date subsequent to the date of this call. Doug?

Thank you, John. Well, obviously our sales in the first quarter fell short of our expectations as we encountered weaknesses in some developing markets and delays in capital releases from many of our larger pharmaceutical customers.

However, as we look at the various pushes and pulls that resulted in the quarter sales performance, I believe that the underlying demand for our products and services remains intact and that we will see improvements as we go through the rest of the year.

When you look at the first quarter, our sales were flat organically and our adjusted earnings per share declined 4%. For the Waters Division, our geographical segmentation of the business is useful in understanding the quarter sales trends. In the quarter, sales growth from the approximately one-third of the business that we derived from the developing regions including non-Japan Asia, Latin America, and Eastern Europe did not provide the growth that we've seen in recent quarters. Our instrument sales in India declined rather sharply due to the residual budgetary effects of a weaker rupee and deferments in capital spending at both generic drug makers and CROs.

With the start of a new fiscal year as we enter the second quarter and more favorable quarterly comparisons, we are anticipating a return to growth in India and are encouraged by an improving trend that we've begun to see early in the second quarter.

In China, sales in the first quarter were up double digits based on strong industrial and governmental spending. Sales growth rates in the Middle East and Eastern Europe were weak in this quarter and this weakness can be attributed to a tough base of comparison as well as the great amount of political instability in the region.

For Western Europe and North America, delays in the release of capital budgets by larger multinational drug firms resulted in slower sales growth rates. The effect of these delays was most meaningful to our business in the US. Spending by smaller specialty and biopharma firms in the US was more in line with our expectations and helped to at least partially offset the weakness in large pharma.

The combination of government and university shipments declined at a mid-single digit rate in the quarter with moderate academic growth offset by significant reductions in global governmental spending. Direct governmental spending was particularly weak in Europe and Japan. Our expectations for government and university spending were not very high for the first quarter and we remain conservative in our outlook for the full year.

You look at a few positive trends in the quarter; our applied markets including food, environment, and clinical diagnostics all grew nicely and in line with our expectations. This growth was based considerably on strong shipments of UPLC MS/MS tailored systems and was fairly balanced geographically and indicative of a continuation of an established growth trend in these applications.

Sales growth to the more economically sensitive industrial chemicals segment held up well in the quarter for both our Waters and TA Instruments Division. Looking more closely at TA Instruments, the division started the year off on a positive note with about 10% sales growth. TA has continued to benefit from sales of its new discovery DSC, TGA, and hybrid rheometer instruments, and in addition began to generate new business in high temperature applications.

Geographically TA saw strongest sales growth in the US, Japan, and China, all growing at strong double-digit rates.

For instrument sales in the Waters Division, highlights in the quarter included continued double-digit sales growth for H class ACQUITY UPLC and for our Xevo family of tandem quadrupole based systems, especially our ultrasensitive Xevo TQ-S.

As I mentioned earlier today, the strength in tandem quadrupole MS-based systems was primarily for applied market opportunities.

Looking at LC Instrument Systems, the H-Class continues to drive lab upgrade business in a broad array of pharmaceutical opportunities especially in drug development and quality control. It is notable that H-Class and Xevo TQ-S performed so well given the earlier side of general weakness in large cap pharmaceutical spending.

The decline in instrument sales we saw for the Waters Division included the adverse impact of lower alliance HPLC sales primarily related to the generic drug weakness in India.

Our recurring revenues, the combination of service and chromatography consumables, grew organically at a 7% rate in the quarter.

Looking at new systems offerings in 2012, we are pleased with the positive reception we received from customers at this year's Pittsburgh conference and more recently at Analytica in Germany. In fact, Waters was recognized with the Editors Gold Award at Pitt Con for our new UPC(2) analytical technology platform. UPC(2) affords us the opportunity to define a new chromatography business that effectively bridges applications that today are less effectively performed with either gas chromatography or liquid chromatography. We have demonstrated how for certain analyses UPC(2) can work better, faster, and in an environmentally friendlier manner.

At Pitt Con and at Analytica, we also showcased a family of ACQUITY columns to expand the application range of our UPC(2) system.

Other notable introductions at Pitt Con included a new version of our NuGenesis Informatics platform and a new line of chromatography reagents and standards. These new launches are in response to clearly express customer needs to streamline data workflow management and to simplify LC and LCMS system calibration and validation.

Before turning you over to John, I want to view our first quarter's performance in a broader context. We currently see factors that will result in better topline growth in the upcoming quarters and feel that the issues that resulted in slower growth at the start of the year are largely temporary. We expect our business momentum in China to continue while other developing markets exhibit improved growth. Already we've begun to see capital budget releases at some of our large accounts. And our key product positions remain strong, with new product launch plans in place for later this year.

In the meantime, we will continue to carefully manage our expenses and deploy our strong free cash flow in a conservative manner that you have come to expect from us -- share repurchases and smaller acquisitions.

In all, I would like to reiterate my belief in our proven business strategy and we are confident in our ability to accelerate our top and bottom line growth as we move through 2012.

Now here's John with some further details on our financials.

Okay. Thank you, Doug. Good morning, everyone. First-quarter sales decreased by 2% and non-GAAP earnings per diluted share were down 4% at $1 this quarter compared to earnings of $1.04 last year.

On a GAAP basis, our earnings were $0.98 this quarter versus $1.01 last year. A reconciliation of our GAAP to non-GAAP earnings is attached to our press release issued this morning.

Reviewing Q1 sales results in comparison to Q1 last year before foreign currency translation, sales were flat with prior year's first quarter. Translation reduced sales by 2%.

Looking at our sales growth geographically and before foreign exchange effects, sales within the US were up 2%; Europe sales were flat; Japan was down 3%; and sales in Asia outside of Japan were up 5%.

On the product front and in constant currency within the Waters Division, instrument systems sales decreased by 9% and recurring revenues grew by 7% this quarter. Within our TA Instruments Division, sales increased by 10% versus prior year.

Now I would like to comment on our Q1 non-GAAP financial performance versus prior year. Gross margin performance came in as expected at 60.2%, comparable to Q1 last year. SG&A expenses were flat this quarter and R&D expenses increased by 5%. Our effective operating income tax rate came in as anticipated at about 16%. Net interest expense was $5.7 million and share count came in at 90.3 million shares, 3 million shares lower than Q1 last year as a result of our continued share repurchase [programs].

On the balance sheet, cash and short-term investments totaled $1.353 billion and debt totaled $1.024 billion, bringing us to a net cash position of $329 million. As for share repurchase, we bought 695,000 shares of our common stock or $62 million this quarter. This leaves $124 million remaining on the current authorized share repurchase program.

We define free cash flow as cash from operations less capital expenditures plus any non-cash tax benefit from stock-based compensation accounting excluding unusual nonrecurring items.

For Q1, free cash flow came in at $100 million after funding $[16] million of CapEx and adding back $6 million of non-cash tax benefit from stock-based compensation.

Accounts receivable days sales outstanding stood at 76 days this quarter, up two days from Q1 last year and inventories increased by $20 million this quarter as is typical for the first quarter of the year.

Overall, we had a slow start to 2012 but we do not see Q1 as being indicative of our full-year performance. As we now think about the remainder of 2012, we expect to see improvements in the majority of our markets around the world and better momentum in large pharma accounts as capital budgets continue to be released.

[Consistent] with prior guidance, we do expect to see continued pockets of weakness in our government and academic segment as the year plays out given the budgetary pressures many countries are facing particularly in Western Europe.

For the remaining quarters of the year, then, we continue to believe that the improvements that I just mentioned coupled with a more favorable quarterly base of comparison will provide for 5% to 7% quarterly growth before currency effects for these next three quarters. For the full year, this would result in sales growth pre-currency of 4% to 6%. Currency at today's levels is expected to reduce full-year sales growth by 2%. Full-year reported sales growth would then be between 2% and 4%.

Moving down the P&L, gross margins are expected to be flat with 2011 at about 60.5%. Operating expenses are expected to grow at a rate less than sales growth as we continue to manage our operating expenses judiciously. Net interest expense is expected to be approximately $24 million and we expect our operating tax rate to be about 16%.

Our fully diluted average share count is likely to be around 89.5 million shares outstanding and when rolling all of this together, we currently expect 2012 non-GAAP earnings per fully diluted share to be in a range of $5.05 to $5.15 per share.

As we think about our expectations for the second quarter of 2012, we expect organic sales growth of about 5% to 7%. Currency translation at today's rates will reduce sales by 2%, resulting in reported sales growth of about 3% to 5%. Non-GAAP earnings per fully diluted share are expected to be in the range of $1.15 to $1.20.

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

(Operator Instructions). Nandita Koshal, Barclays Capital.

Good morning. Doug, I guess I will start with a question around the pharma spending because that seems to be the biggest surprise this quarter. I think India was somewhat expected but what was the reason behind the pullback by these large pharma customers? And did it come as a surprise to you pretty much late in the quarter or were there leading indicators that you sort of look at that pointed to some kind of weakness in the quarter? And then what are you looking at on a forward-looking basis?

I think it's fair to say it was somewhat surprising to us, in the same way maybe that the fourth quarter was a little stronger than we originally expected. The out of the chute momentum that we thought would improve as we went through the quarter didn't material in the first quarter.

Now we have clearly at this point autopsied a lot of the particular regions, a lot of the large accounts. We believe we have got good reason to believe that this is a delay and not a permanent delay and we have got some pretty good evidence of orders moving through the pipeline earlier on in the second quarter.

So it's fair to say that in prior years at times we have seen delays in capital at big pharma. This was a more significant delay than we have typically seen. But I should say that it is probably split kind of evenly from the big pharma dynamic and the developing markets. It's true that we didn't expect India to go gangbusters out of the chute as we weighted the beginning of the fiscal year but it was a much steeper slowdown in India than we expected.

Thanks, Doug. Just a quick follow-up on sort of the reasons behind the pharma weakness. Could there be a competitive dynamic going on there? I just wanted to clarify that. Thank you.

Well, I think it's always dangerous to look at significant share dynamics on a quarter-to-quarter basis. Clearly if we had done that you could have said, well gee, they gained share in the fourth quarter and something happened in the first quarter. We don't think that's happening. You always have some competitive losses and some competitive wins. We think that this is a market dynamic and not a competitive dynamic.

We will continue to monitor that but we haven't seen any product introductions or customer losses that work against us. So it's fair to keep our eyes open on that but I can't say that we have seen much evidence of it at this point.

Thank you very much.

Jon Groberg, Macquarie Capital.

Thanks a million for taking the questions. Just two quick ones for me, Doug. I guess first, I know you typically don't talk in terms of orders but one of your peers actually just the other day mentioned very similar dynamics to what you talked about in terms of end markets on the mass spec side. But they mentioned that throughout the quarter orders kind of continually improved.

So can you maybe just talk about your order growth rates in particular in maybe in countries like India and some of the weaker areas?

And then the second just a kind of follow-up maybe for John, if you think about your guidance, can you maybe split your consumable outlook versus your instrument outlook? It seems like consumables were fairly strong this quarter, but obviously offset by pretty weak instruments. Thanks.

Sure, John, I think there's a good reason for being careful about orders rate dynamics because orders don't have the same dynamic that sales do and orders can be canceled and order patterns can differ dramatically from sales pattern.

I do think it is a qualitative measure that can be useful and I think it is fair to share that our order rate growth was better than our sales dynamic this quarter. So that is a fact that I think is a fair one to share.

And the first quarter of last year you will recall we had some large mass spec shipments that came out of backlog, so that had an impact on us. But it's also fair to say that our orders came in softer than we expected and I think the dynamic of the slow release in big pharma is a fair one to keep in mind. We think that will begin to catch up and we will continue to monitor that closely. The second part --

Second was just a question on splitting out the guidance between recurring revenues and instrumentation and on that one, Jon, we are pretty confident that our recurring revenues will retain about that 7% rate you saw in the first quarter and then instruments are likely to be the variable that for the next three quarters would bring us down to the lower end of the range, which is 5%.

So instruments by themselves could be 4% to 6%, something in that range with recurring being closer to 7% for the next three quarters is what is incorporated in our guidance.

John, do you think -- the reason I was asking -- do you think the extra day had much of an impact on the consumable or the recurring revenues in the first (multiple speakers)?

No, I don't. I think de minimis. It wouldn't even have been a percent, so I think the 7% growth is -- there was a little bit of a base comparison on the chemistry side. Service was very strong. We are pretty confident we are going to see about that rate as we go across the next three quarters.

Okay. Thanks.

Dan Leonard, Leerink Swann.

Thank you, quick question on your emerging market commentary or developing market commentary. How sensitive do you think your business would be in China to the lower-than-expected GDP growth over there?

It's a fair question. I think most of the attention is on bigger projects, infrastructure projects. I think as we continue to probe this matter and look at laboratory spending and life science spending, it's not likely to be the first target or a major target of budgetary slowdowns in China. Now of course if a major reduction happens, it probably drops all boats a little bit, but we are not seeing it at this point.

Okay, thank you. And then my follow-up. Can you give us an update on the attach rate on your UPLC instruments?

In terms of the chemistry?

Yes.

Yes, ACQUITY chemistry that goes along with --

It appears to be in about the 80% range at this time. It was higher in the beginning as we introduced the H-Class, that particular technology, unlike the original introduction, enables the customer to utilize conventional LC columns, which in fact can be a broader base of manufacturers' columns. But in terms of UPLC utilization, the column attach rate for UPLC column specifically remains very high because of their performance.

Okay, thank you.

Daniel Brennan, Morgan Stanley.

Thanks for taking the call. Just on the large pharma customers, just Doug and John, what are you hearing from these customers that why they discuss the slow release this year? Is it the uncertain economy? Is it anything new on just kind of R&D? Just kind of wondering so maybe some color if you could provide it about what gives you confidence that the slow release is going to open up?

It's a fairly broad-based dynamic, so it's one of the things that makes us believe that it's not really a competitive dynamic. It is both Western Europe and the United States, pretty much across the board. Particularly as we have gone back more deeply into these accounts as we have started into the second quarter, it's telling how emphatic most of these accounts are about their intention to buy during the rest of the year.

That's why as we are probed, did we lose big orders? Did somebody else penetrate into these accounts? We can't find that dynamic. We can find a lot of complaining about delays and laboratories being able to get their requests through their systems and their continuing desire to buy our products.

So that part is confident with the part that is sometimes difficult to call is when will it release? It's why we think we have seen some kind of leakage coming in that release process, but it's way too early to declare victory that this was just a one-quarter dynamics. We will continue to monitor this pretty closely.

Maybe just as a quick follow-up sort of related to that, so it sounds like the customers themselves aren't indicating that kind of budgets are going to come in below original expectations. They're kind of maintaining their overall budget outlook but expecting it to pick up.

And then maybe related to that, what were you basing your pharma end market or what were you assuming for the pharma end market to grow at this year for Waters prior to today and what do you think it grows at now for 2012? Thanks.

They are in mid-single digits.

In terms of the budgets, have they indicated that actually budgets will decline from original (multiple speakers)

I think what we have seen indicated, now this isn't an algebraic formula that you can point to, but we continue to believe that is consistent with what big pharma is intending. That is certainly what the people down the ladder in pharmaceutical QC and development labs believe. Now sometimes there are out of step with what their top management but so far our triangulation suggests that that is still a reasonable outlook for the year.

Thank you.

Paul Knight, CLSA.

In the other parts of Asia such as China, particularly Japan, could you talk about -- did you see any recovery from the tsunami in that marketplace?

I would say what we -- Japan, with a few exceptions, has been a kind of stable, very low growth territory for a number of years now. I think in this quarter, we had a particularly tough comparison largely because of some backlog dynamics in Japan last year. I would say we are still seeing kind of the same basic level of momentum, maybe a little bit of infrastructure spend in Japan has kind of gone away from the life science laboratory towards basic infrastructure rebuild. We hear stories like that that's largely you can't point to government statistics so much. But I believe some of that has gone on in the last six months or so.

So if that's true, I think we will begin to see a little bit of performance improvement coming out of Japan as we go forward.

And then what color or what should we be watching regarding the currency, the frank, the yen, the dollar relationship? Any hedging or actions you have taken to reduce that volatility or risk this year?

No, traditionally for a lot of reasons that we have talked about in the past, the notion of hedging forward your currency sales risk just doesn't particularly work in this industry.

The yen has weakened a little bit against the dollar in the past three to four months, was in the high 70s, now it's in the low 80s. It seems to be stable around that low 80s level. And the euro has been -- got as low as the mid 120s. It's now in the low 130s. It bounces around there a little bit. That's the level that we are anticipating for the rest of the year. That's as good a forecast I suppose as you can make at this point.

Thank you.

Quintin Lai, Robert W. Baird.

Good morning. So, Doug, on the call you mentioned that the H-Class and Xevo did well. So as you kind of parse through the Q1 results, was some of the budgetary issues with big pharma more on the -- for lack of a better word -- more routine or the older instruments in an upgrade cycle just kind delayed out?

Well, there's two things I would say, Quintin. The earlier stage parts of R&D suffered the most, so that's discovery and the higher-end mass specs. And then the alliance line particularly with generics were the two major dynamics that we see in the pharma world.

With respect to India, Doug, are you relooking at that region about maybe how you go to market there, maybe pricing more of your instruments in local currency to take out some of the volatility in demand?

Frankly, you know, I think we don't see any real competitive dynamic here that's changing the thrust. I think almost everything going on in India is related to internal struggles and the rupee, but we are not going to price in India really differently than we price anywhere else. The end market pricing in India is about the same as we are seeing everywhere else in our international world and we don't think that pricing is going to dramatically change our end market performance.

This is something we got to work through. We have an excellent position, have very high market share in India. We've got to get through the local dynamics on the regulatory burdens and the CRO and then new product development issues that they are experiencing in India.

We think we see some of that coming. I think it's probably going to take into the second half of the year before we see any kind of return to normalcy in India.

Thanks.

Tycho Peterson, JPMC.

Thanks, a number of my questions have been answered but maybe just one starting off on kind of your cost structure, you've always talked about your ability to pull levers if needed. At this stage in the year, do you have any updated thoughts on cost structure heading into the rest of the year in light of this first quarter coming in a little bit below expectations?

No, I will let John embroider a little bit here, but you can see that our SG&A spending was flat in the quarter. We didn't dramatically adopt any plans to restructure our results because at this point we don't think that we are seeing a long-term significant reduction in demand. We are continuing to monitor that, Tycho, and if we change that belief, we will have to look at our cost structures.

But I think you can tell that within the relevant range, we haven't exploded our cost structure and as a result if we are right about a return to normal levels of demand, then we will be able to leverage that uptick in demand to pretty good earnings results.

We also typically back-end load investment spending and new headcount and the like and obviously we didn't do much if any of that in the first quarter and we're going to lag that out a bit too in the second quarter until we are comfortable that we are on track. So we kind of naturally in our budget cycle have that kind of capability to keep at bay those investments until we are comfortable that it's time to spend.

Then maybe a question in Europe. I think you said that that was flat. One of your peers had reported on mass spec numbers had talked about that being particularly soft. Can you just talk about your visibility into Europe in light of the broader pharma commentary you provided but also how you think about Europe over the next couple of quarters?

Well, I would say Europe and the US overall had similar dynamics. There was similar disappointment in the output of the large pharma. Europe probably a little bit more weighted to large pharma. And we clearly -- we anticipated soft governmental spending. We certainly saw that.

You know, I guess I --we've certainly seen the weakest conditions in southern Europe which have the most macroeconomic issues. And I guess other than that I don't think that there's anything -- I would say that the weakness in the government academic segment affects the high-end mass spec and we certainly saw that because that's -- much of that is government-funded initiatives.

So I would say we are not anticipating that to change too much. We do think the pharma segment should improve as we go through the year.

Then maybe just a last one on pharma, again you I think had talked about the assumptions from mid single-digit growth there and we are just trying to understand what's behind that if you kind of look at the aggregate pharma R&D budgets, they are flat to probably down over the next couple of years. So what gives you conviction that you can kind of -- you can outgrow that market? Is it share shift? Is it new product cycles? Is it kind of continued conversion of ACQUITY?

Yes, when we look at our pharma business, Tycho, it's about 60% of our business broadly defined. The large pharma portion of it is about -- it's under 10% this quarter but it's typically 11% -- 11%, 12%. And that group typically lags the overall segment that we talk about growing mid single digit. So the expectation for large pharma within that overall segment is a few points less or more than the average. So it's a low single-digit growth expectation for these top accounts.

They were down double digit in the first quarter causing the issue that we are looking at and we are confident that that is not going to continue at that rate for the remainder of the year. But it's really the generics. It's the biotech. It is the CROs that grow more quickly than they -- than the average that we think will come back and provide an overall growth that's mid single digit. It won't be large pharma that's going to drive us to that mid-single digit rate.

Okay, thank you very much.

Doug Schenkel, Cowen & Company.

Good morning. Thanks for taking the questions. Clearly you have talked a bit about what makes you feel better about the outlook moving forward. You've also mentioned in response to a few earlier questions that Q4 was a bit stronger than you expected, and clearly Q1 was a bit weaker. So taking this a step further, if we continue to look backwards are there signs that maybe Q4 may have benefited a bit at the expense of Q1?

Related to that, if we go back and look at your pharma growth for last year by quarter, I think sequentially the 20% year-over-year of 13%, 10% and 6% or something in that ballpark, clearly most of those figures are well above the historical norm. So you did talk a lot about delays in pharma capital budget releases, but is there a chance you guys were just overly aggressive in your internal forecast relative to what is a pretty difficult comp?

Go ahead, John.

Yes, I think as we look at the quarters of the year, there's no doubt that we have historically seen a fair amount of seasonality. And we have historically pointed out that Q1 and Q4 are always the most difficult orders to forecast. In the fourth quarter you've got the capital spend it or lose it mentality where you're waiting for the big push at the end of the year for people to spend their CapEx budgets, and then at the start of the year they have to re-up that capital budget. And some of them get released early in the year, some of them get released into the second quarter. So the first quarter and the fourth quarter for us was, particularly with large pharma, was always a little bit difficult to forecast.

And I don't necessarily look at this and say that there was a trend developing across last year for which Q1 is a point on any line. I see it as a point off the line. It is true that in Q1 last year we came out of the gate very strong. There was spending very early on from a lot of pharmaceutical accounts. I think they felt better about the business or better about business environment just generally, so the basic comparison was difficult.

We thought we had that accommodated in a lower expectation for the first quarter than for the full year, but we did not foresee a significant number of large pharma accounts really spending almost nothing on capital to start the year, which is where Q1 landed.

Okay, that's helpful. I guess on the other topic du jour, India, this is -- this rupee devaluation issue is now a multi-quarter phenomenon. Given that plans for purchases accordingly have in some cases been delayed for a few quarters, is it fair to conclude that there is a bolus of demand that should be worked through in early Q2 with the budgets being reset? Are you seeing this already?

We believe that. We think we see some sign of that, Doug, but it's -- I'm going to be very careful because I thought we would see a little of that in the first quarter and we didn't. If anything, we didn't -- you've got multiple issues facing the Indians, including some relatively newly arising regulatory issues with their ability to export into the US. That may be making them a bit more conservative in how they look at near-term spending too.

We think that's not going to change the ultimate view of India and the likelihood that the investments have to be made in order to keep up with the generic drug demand but it might take a little bit longer than I would otherwise like.

Okay, if I could sneak in one last operational question, as you noted, SG&A I believe was flat year-over-year. Is this largely just a function of the weaker than expected instrument contribution in the quarter? And if so, how much higher would this have been if you had hit your guidance? Is this the right -- what's the right way to think about this moving forward? Thank you.

I would say the biggest reason why Q1 was flat was because of lower sales associated with less commission, less cost on that front. We've talked about SG&A growing a point or two less than sales growth. I would say that we look like we are on track to continue to be able to assume that. But I would say that there are natural variable spend in the business that ratchets up and down with the sales line and largely that's what you saw in the first quarter.

But as John has said before, we were careful coming into the year. We typically are -- maybe we are even a little bit more careful in spending on headcount. So we are not adding heads anticipating that we would see how this year began to spin itself out. And I would -- we are prudent in that and we will continue to be prudent.

Operator, is there another question?

Amit Bhalla, Citigroup.

Thanks, good morning. Doug, I am just trying to wrestle with the inherent uncertainty in budgets with your commentary that you are seeing evidence of the orders moving through the ones that obviously didn't come through in the first quarter. Can you expand on this comment that you have evidence that orders are pulling through? Talk a little bit about the size of those orders and do they make up for the miss in the first quarter?

I should say that what we are seeing is both the placement of some orders and perhaps more confidence on the part of the customers that we are dealing with that those orders are progressing down their internal cycle at a more pronounced pace. So I wouldn't say it's all related to actually hard copy orders that we have in hand.

But as a lot -- a lot of these customers had told us that they were placing orders in February and March of course. It was not -- was not just a dream that we had that this business was coming. They fully expected to get their budgets cleared. They fully expected to place them and in many cases they would say the order is in purchasing. I can't get it out of purchasing.

Now those things are beginning to move in a faster clip down that process particularly in a number of these large pharmas that we have good relationships with. So I would say clearly some of those large orders that we were tracking and expected to get in the first quarter have now started rolling in in the second quarter and that evidence makes us feel better.

From a size perspective, though, like enough to offset what happened in the first quarter or maybe just (multiple speakers)

I think it's just fair to say it's early on in the quarter. Three weeks does not a quarter make. It's a good sign but certainly in no way to say that we've got the quarter in hand. So it's a good fact and it's a positive fact that we didn't have a month and a half, two months ago. So that's all I'm willing to say. It's no guarantee but it's a good fact.

Okay, and then my follow-up is just on the trend of R&D rationalization, you've talked about that in the past as something that has been ongoing. How are you viewing pharma companies rationalizing R&D spending going forward? What is your underlying assumption of how that impacts this end market?

Well, I think it's been a continuing trend for a lot of years. I don't think that what we are seeing in the early part of this year is a dramatic change from kind of what we saw in 2011. You are continuing to see more emphasis on outsourcing, continuing to see these companies work with moving clinical trials into areas like India and Eastern Europe and you are continuing to see a shift in influence from small molecule drugs to biopharmaceuticals. We think that that shift to biopharmaceuticals is richer in our kinds of technology than small molecular weight dynamics.

So we don't see that changing. You can't find a big pharma that doesn't lead any of these discussions with the fact that in the near term most of their influence is on biopharmaceuticals.

Thanks.

(Operator Instructions). Jon Wood, Jefferies.

Thanks a lot. Can you offer any context on the acquisition contribution? I know you did two small deals, one late last year, one early this year. What does that contribute to the first quarter as well as the year in terms of sales?

Yes, it was -- it rounded to nothing. It was a few points of the TA growth, so TA we said grew at 10% before currency. It would've been about 7% without the acquisition but it's de minimis on the full Company basis.

Okay. So less than 50 basis points for the year -- (multiple speakers)

For the quarter.

What about the year?

And for the year too. It's kind of level. We continue to look at doing other things of this nature, but it's hard to imagine that it would be getting much more significant than that for the year.

Okay, great. Can you offer, Doug, just an updated view geographically for 2012 US, Europe, and then Japan and Asia outside Japan? Just give us where your guidance is now set kind of from a geographic perspective?

Let's see. John, maybe --?

Yes, I'll get that. For the rest of the year, we are looking at a growth that is 5% to 7%. We are looking for the developing areas of the world to improve and to be kind of at a higher end of that kind of a high single-digit expectation for the developing world, so that would include China. That would include Latin America, Eastern Europe.

We're looking for Europe to grow in the low single digits, being dragged down throughout the year through issues and pressures on the government side of business there. We're looking for the US to be about a mid single-digit growth rate for the remainder of the year and Japan kind of a low to mid depending on basic comparison.

Okay, so it's safe to say that the disappointment here is pharma-related, right? So if you look at your applied industrial and I guess I would include chemical, has anything changed in your view on that set of end markets for the year?

I would say -- you heard us talk about our belief that pharma is going to improve, so I think we've talked enough about that. The industrial chemical and the applied markets have performed well and we expect those to continue to perform well. So I think certainly on the industrial side both Waters and TA have brought evidence that that should continue.

Great, thanks a lot.

Operator, I think we could probably take one more question as we get to the bottom of the hour.

Isaac Ro, Goldman Sachs.

Good morning. Thanks for squeezing me in. First question I wanted to ask you, you guys have spent a lot of time talking about the macro and market drivers of the quarter miss there and I wanted to maybe isolate and be just specific about asking about any large orders from specific customers within pharma that might have caused disruption. Was it fair to say that it wasn't isolated to any handful of large orders?

That's correct, Isaac.

Okay and then just secondly if I look at the sort of components of the growth this quarter, you had organic -- you had growth in the consumable side of I think 7% and then I think you said the instrumentation side was down about 9. As you look at as orders growing a little faster than sales this quarter, is it fair to say that we will see a reversion to the mean so to speak between those two components of the business?

That's the expectation, yes.

Okay. That's all for me. Thank you.

Thank you and thank you all for being with us. We look forward to talking hopefully with better results at the end of the second quarter. Thanks very much.

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