Waters Corporation (WAT) Q1 2012 Earnings Report, Transcript and Summary

Good morning. Welcome to the Waters Corporation First Quarter 2012 Financial Results Conference Call. [Operator Instructions] 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. Well, 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, the Vice President of Investor Relations. As our normal practice, I'll 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'd 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 and 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 U.S. Securities and Exchange Commission, U.S. Food and Drug Administration and 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 legislations 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 or 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; introduction of competing products by other companies and loss of market share; pressures on prices from competitors and customers; regulatory, economic and competitive obstacles from 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 options, particularly involving claims for infringement of patents and intellectual property; foreign exchange fluctuations potentially affecting translation of the company's future non-U.S. operating results. Such factors and others are discussed more fully in the section entitled Risk Factors on 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's sales performance, I believe that the underlying demand for our product 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, a geographical situation of the business is useful in understanding the quarter's sales trend. In the quarter, sales growth from the approximately 1/3 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. At the start of a new fiscal year, as we enter the second quarter and more favorable quarterly comparisons, we're anticipating a return to growth in India and are encouraged by an improving trend that we've begun to see earlier 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 rate. The effect of these delays was most meaningful to our business in the U.S. Spending by smaller specialty and biopharma firms in the U.S. 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 on our outlook for the full year. When 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 stronger sales growth in the U.S., 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 and a broad array of pharmaceutical opportunities, especially in drug development and quality control. It's notable that H-Class and Xevo TQ-S performed so well given the earlier cited 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 in Analytica in Germany. In fact, Waters was recognized with the Editors' Gold Award at Pittcon for our new UPC2 analytical technology platform. UPC2 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, UPC2 can work better, faster and in an environmentally friendlier manner. At Pittcon and at Analytica, we also showcased the family of ACQUITY columns to expand the application range of our UPC2 system. Other notable introductions at Pittcon 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 expressed customer needs to streamline data workflow management and to simplify LC and LC/MS system calibration and validation. Before turning you over to John, I want to view our first quarter's performance on a broader context. We currently see factors that will result in better top line 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 have 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'll continue to carefully manage our expenses and deploy our strong free cash flow in a conservative manner that you've come to expect from us, share repurchases and smaller acquisitions. In all, I'd like to reiterate my belief in our proven business strategy, and we're 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 U.S. 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 system 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 $1,353,000,000, and debt totaled $1,024,000,000, bringing us to a net cash position of $329 million. As for share repurchases, 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 the capital expenditures plus any non-cash tax benefit from stock-based compensation accounting, excluding unusual non-recurring 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 day sales outstanding stood at 76 days this quarter, up 2 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 for 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. Just to the 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 and comparison, will provide for 5% to 7% quarterly growth before currency effects for these next 3 quarters. For the full year, this could 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. Doug?

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

[Operator Instructions] Our first question comes from Nandita Koshal with Barclays Capital.

Doug, I guess I'll 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 looked 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 materialize in the first quarter. Now we've clearly, at this point, autopsied a lot of the particular regions, a lot of the large accounts. We believe we've got good reason to believe that this is a delay and not a permanent delay, and we've got some pretty good evidence of orders moving through the pipeline earlier on in the second quarter. So we've -- it's fair to say that in prior years, at times we've seen delays in capital at big pharma. This was a more significant delay than we've typically seen in the year. But I should say that it's probably split kind of evenly from the big pharma dynamic and the developing market. 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.

And just a quick follow-up on the reasons behind the pharma weakness. Could there be a competitive dynamic going on there? I just wanted to clarify that.

Well, I think it's always dangerous to look at significant share dynamics on a quarter-to-quarter basis. Clearly we've 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'll 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, Nandita, but I can't say that we're seen much evidence of it at this point.

Our next question comes from Jon Groberg with Macquarie Capital.

Just 2 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. And then just -- 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 countries like India and some of the weaker areas? And the second is kind of a 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. It was obviously offset by pretty weak instruments.

Sure, Jon. 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 I mean that's a fact that I think is a fair one to share. And the first quarter of last year, you'll 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'll begin to catch up, and we'll continue to monitor that closely. The second part of your...

The second was just a question on splitting out the guidance between recurring revenues and instrumentation. And on that one, Jon, we're 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 3 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 getting closer to 7% for the next 3 quarters is what's incorporated in our guidance.

So 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 quarter?

No, I don't. I think that, de minimis, it wouldn't even have been 1%. 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're pretty confident we're going to see above that rate as we go across the next 3 quarters.

Our next question comes from Dan Leonard with Leerink Swann.

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

Dan, 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're not seeing it at this point.

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

Yes. You want to -- in terms of the chemistry?

Yes.

ACQUITY chemistry that goes along with...

Yes. 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 columns specifically remains very high because of their performance.

The next question comes from Daniel Brennan with Morgan Stanley.

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

Boy, it's a fairly broad-based dynamic. So I mean it's one of the things that makes us believe that it's not really a competitive dynamic. It's both Western Europe and the United States. They're pretty much across the board. Particularly, as we've gone back more deeply into these accounts as we've 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. I mean, that's why as we've 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 in laboratories being able to get their request through their systems and their continuing desire to buy our products. So that part is confident, but the part that's sometimes difficult to call is when will it release. That's why we think we have seen some kind of a leakage coming in that release process, but it's way too early to declare victory that this just was a one-quarter dynamic. We'll continue to monitor this pretty closely.

And then 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 tick up. And then maybe related to that, what are you -- 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?

Mid-single digits.

And in terms of the budgets, have they indicated that actually budgets will decline from original [indiscernible]?

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's consistent with what big pharma is intending. That's certainly what the people down the ladder in pharmaceutical QC and development labs believe. Now sometimes, they're out of step with what their top management, but so far, our triangulation suggests that that's still a reasonable outlook for the year.

Our next question comes from Paul Knight with CLSA. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division: In the other parts of Asia such as China, particularly Japan, could you talk about the -- do you see any recovery from the tsunami in that marketplace?

I would say what we -- Japan's, with a few exceptions, has been a kind of stable, very low-growth territory for a number of years now. I think -- and this quarter, we had a particularly tough comparison largely because of some backlog dynamics in Japan last year. I'd say we're 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 -- no, you can't point to government statistics so much, but I believe some of that's gone on in the last 6 months or so. So if that's true, I think we'll begin to see a little bit of performance improvement coming out of Japan as we go forward. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division: And then what color or what should we be watching regarding the currencies, the franc, the yen, the dollar relationship? Any hedging or actions you've taken to reduce that volatility or risk this year?

No. I mean, traditionally, for a lot of reasons that we've 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 3 to 4 months; was in the high 70s, now it's in the low 80s, seems to be stable around that low 80s level. And the euro has been -- it got as low as the mid 1.20s. It's now in the low 1.30s. It bounces around there a little bit. That's the level that we're anticipating for the rest of the year. That's as good a forecast, I suppose, as you can make at this point, Paul.

Our next question comes from Quintin Lai of Robert W. Baird. Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division: 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, I mean, was some of the budgetary issues with big pharma more on the -- for lack of a better word, more routine? Or are the older instruments in an upgrade cycle just kind of delayed out?

Well, there are 2 things I'd 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 aligned particularly with generics were the 2 major dynamics that we see in the pharma world. Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division: And then with respect to India, Doug, is there -- are you really looking at that region about maybe how you go to market there and maybe pricing more of your instruments in local currency to take out some of the volatility in demand?

Frankly, no, Quintin. 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're not going to price in India really differently than we prize anywhere else. The end market pricing in India is about the same as we're 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. We have very high market share in India. We got to get through the local dynamics on the regulatory burdens and the CRO and then new product this year, the new product development issues that they're 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.

Our next question comes from Tycho Peterson with JPMC. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: A number of my questions have been answered, but maybe just one starting off on kind of your cost structure. I mean, you've always talked about your ability to pull levers if needed. At this stage in the year, I mean, 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 bit below expectations?

I'll let John embroider a little bit here, but I mean 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're seeing a long-term significant reduction in demand. We'll continue to monitor that, Tycho, and if we change that belief, we'll 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're right about a return to normal levels of demand, then we'll be able to leverage that uptick in demand to pretty good earnings results.

We also typically back-end load investment spending in new headcount and the like and obviously, we didn't do much of any of that in the first quarter and we're going to lag that out a bit too in the second quarter until we're comfortable that we're on track. So we kind of naturally in our budget cycle have that kind of capability to keep at bay those investments until we're comfortable that it's time to spend. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: And then maybe a question on Europe. I mean, I think you said that that was flat. One of your peers that had reported on mass spec numbers had talked about that being particularly soft. Can you just talk about your visibility into Europe and in light of the broader pharma commentary you provided, but also how you think about Europe over the next couple of quarters?

Well, I'd say Europe and U.S. were -- overall, had similar dynamics. It was similar disappointment in the output of the large pharma. I mean, Europe is probably a little bit more weighted to large pharma, and we clearly -- we anticipated soft governmental spending. We certainly saw that. I guess the -- and we've certainly seen the weakest conditions in Southern Europe, which had the most macroeconomic issues. And I guess other than that, I don't think that there's anything -- I'd say 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'd say we are not anticipating that to change too much. We do think the pharma segment should improve as we go through the year. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: And then maybe just last one on pharma again. You -- I think you talked about it, an assumption for mid-single-digit growth there, and we're just trying to kind of understand what's behind that. I mean, if you kind of look at the aggregate pharma R&D budgets, they're flat to probably down over the next couple of years. So what gives you conviction that you can kind of -- that 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 -- well, it's under 10% this quarter, but it's typically 11%, 12%, and that group typically lags the overall segment that we talked 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. I mean, they were down double digit in the first quarter, causing the issue that we're looking at, and we're confident that that's not going to continue at that rate for the remainder of the year. But it's really the generics. It's the Biotech. It's the CROs that grow more quickly 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.

Our next question comes from Doug Schenkel with Cowen and Company.

Clearly, you've 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? And related to that, if we go back and look at your pharma growth for last year by quarter, I think sequentially, you did 20% year-over-year, 13%, 10% and 6% or something in that ballpark. Clearly, most of those figures are well above the historical norms. 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 quarters to forecast. In the fourth quarter you've got the capital spend, an elusive 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 we -- 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's -- 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 the 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 phenomena. 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? And 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'd see a little of that in the first quarter, and we didn't. If anything, we didn't. Now you've got multiple issues facing the Indians, including some relatively newly arising regulatory issues with their ability to export into the U.S. 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'd otherwise like.

Okay. And 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? And is this the right -- what's the right way to think about this moving forward?

Yes. I'd say that 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 1 point or 2 less than sales growth. I would say that we look like we're on track to continue to be able to assume that. But I would say that -- I mean, 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.

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

Our next question comes from Amit Bhalla with Citigroup.

Doug, I'm 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?

Well, I mean, I should say that what we are seeing is both the placement of some orders and the -- perhaps more confidence on the part of the customers that we're 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 a lot of these customers had told us that they were placing orders in February and March, of course. I mean, we -- it was just not 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'd say, "The order's 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'd say we -- clearly, some of those large orders that we were tracking and expected to get in the first quarter have now started rolling in on 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 can you maybe just have that?

Well, 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 it certainly is 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 1.5 months, 2 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's 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're seeing in the early part of this year is a dramatic change from kind of what we saw in 2011. You're 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're continuing to see a shift in influence from small molecule drugs to biopharmaceuticals, and we think that that shift to biopharmaceuticals is richer in our kinds of technology than small molecular weight dynamic. 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.

[Operator Instructions] Our next question comes from Jon Wood with Jefferies. Jon Davis Wood - Jefferies & Company, Inc., Research Division: Can you offer any context on the acquisition contribution? I know you did 2 small deals; 1 late last year, 1 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 there was -- TA, we said, grew at 10% with -- before currency. It would have been about 7% without the acquisition, but it's de minimis on a full company basis. Jon Davis Wood - Jefferies & Company, Inc., Research Division: Okay. So less than 50 basis points for the year?

Less than 50.

For the quarter.

And the year. Jon Davis Wood - Jefferies & Company, Inc., Research Division: Okay. What about the year?

And for the year, too. For the year, yes.

I mean, 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. Jon Davis Wood - Jefferies & Company, Inc., Research Division: Okay. Great. And then can you offer, Doug, just an updated view geographically for 2012, U.S., 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. Yes. John maybe...

Yes. I could get that. For the rest of the year, we're looking at a growth that's 5% to 7%. We're looking for the developing areas of the world to improve and to be kind of at the 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 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 U.S. 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. Jon Davis Wood - Jefferies & Company, Inc., Research Division: Okay. And then 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'd say we -- you heard us talk about our belief that pharma's 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 broad evidence that, that should continue.

Our next question comes from Isaac Ro with Goldman Sachs.

The first question I wanted to ask, I just -- you spent a lot of time talking about the macro end 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 there -- is 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 sort of the components of the growth this quarter, you had organic growth. 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 the orders growing a little faster than sales this quarter, is it fair to say that we'll see a reversion to the mean, so to speak, between those 2 components of the business?

That's the expectation, yes.

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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