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Waters Corporation (NYSE:WAT)

Q1 FY08 Earnings Call

April 22, 2008, 8:30 AM ET

Executives

Douglas A. Berthiaume - Chairman, President and CEO

John Ornell - VP, Finance and Administration and CFO

Analysts

Ross Muken - Deutsche Bank Securities, Inc.

Quintin Lai - Robert W. Baird

Tycho Peterson - J.P. Morgan Securities

Jonathan Groberg - Merrill Lynch

Derik deBruin - UBS (US)

John L. Sullivan, CFA - Leerink Swann & Company

Operator

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.

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

Thank you. And good morning, and welcome to the Waters Corporation first quarter financial results conference call. With me on today's call is John Ornell, Waters' Chief Financial Officer.

And 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 the -- our outlook for the second quarter and then for the full year.

But before we get going, I'd like John to cover the cautionary language.

John Ornell - Vice President, Finance and Administration and Chief Financial Officer

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, and for Q2 and full year 2008. We caution you that all such statements are only predictions and actual events or results may differ materially. For detailed discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our present expectations, read [ph] our 10-K annual report for the fiscal year ended December 31, 2007, Part I under the caption 'Business Risk Factors.' We further caution you that the company does not obligate or commit itself by providing this guidance to update predictions.

We do not plan to update 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. In our discussion 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.

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

Thank you, John. Well, overall I've said, I am 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 share of the variation in our 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 system. Discussions with both our customers and our management staff in Europe suggested much of the weaknesses 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 expectations; both [ph] 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. Yet too 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 in the past few 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're 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 at some of our historically largest accounts, ones that have been particularly conservative during the past couple of years, maybe 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 we will continue to see strong growth here for the rest of the year.

In Japan we continue to weather a combination of soft market conditions and a difficult base quarter comparison. Though 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 are very confident that the first quarter's result is somewhat of an aberration and that growth rates for our recurring revenues will rebound during the year.

Looking at TA Instruments we are 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 line.

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 to 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 cost further, as well as providing additional tax benefits.

John will be walking you through other P&L detail, I wanted to comment on our strong cash flow in the first quarter and reemphasize the priority we've placed on this important metric.

During the quarter and before funding the transition from a defined benefit retirement plans to 401(k) 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 our share repurchase program. And looking at our investment plans for 2008 you should expect us to continue to seek up acquisition opportunities slightly similar in size as we have 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.

John Ornell - Vice President, Finance and Administration and Chief Financial Officer

Thank you, Doug.

Our first quarter results delivered 12% sales growth and 23% growth in non-GAAP earnings per diluted share. Earnings per share was $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. A 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 six 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 US 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 remained strong and were up 27%.

Turning to the product fronts within the Waters division, instrument systems grew by 5%, our service business grew by 7%, and chemistry had a 3% growth rate. At TI Instruments division had another strong quarter 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 exhibiting 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%.

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 continued 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. 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 benefits from FAS 123R accounting, and excluding unusual non-recurring items.

In the quarter, free cash flow hit a record $100 million after funding $14 million of CapEx and adding back $6 million of FAS 123R tax benefits, and excluding a $12 million payment associated with the transition of pension plan to 401(k) plan in the U.S. However, free cash flow in Q1 last year was $78 million.

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

And 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 more difficult in economic environment Japan, we believe that a reasonable expectation for sales growth for 2008 would be somewhere in the range of 6 to 8% for organic sales for the full year. Currency of today's levels should add at least 4% to growth this year bringing our overall growth rate to 10 to 12%.

Moving down to 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 ACQUITY products, favorable mass spec sales mix that contains more high-end mass spec system sales, our favorable product cost reductions, the favorable foreign currency translation benefit.

Operating expenses are expected to grow at a rate about equal to sales. As the year progresses, we will moderate our spending, our additional resources to keep our expense growth aligned with actual sales volumes.

We expect our tax rate to be about 18.6% for 2008, and net interest expense is expected to be in the neighborhood of $20 million. And 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 for 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?

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

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

Question And Answer

Operator

Thank you. [Operator Instructions]. Ross Muken with Deutsche Bank.

Ross Muken - Deutsche Bank Securities, Inc.

Good morning, gentlemen.

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

Good morning.

Ross Muken - Deutsche Bank Securities, Inc.

Well can you talk a bit about sort of the delays we saw in the pharma side both U.S. and Europe and sort of -- 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 any pickup to the end of Q1 that led us to believe that Q2 would sort of be a bit more robust than what we saw from a demand perspective this quarter?

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

Ross, I'd say we saw 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've -- we saw continual optimism from those accounts, in terms of what they were likely to do. So 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 advances to what we started off the second quarter, I think on balance that's a net positive that there continues to be very high "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 dynamic seems to be pretty positive moving into the rest of the year. That's a tough call, and that's 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.

But, I'd say we are coming -- at this point we are cautiously optimistic that we are going to see better performance out of pharma for the rest of the year.

Ross Muken - Deutsche Bank Securities, Inc.

And in terms of the balance of demand for ACQUITY versus Alliance, sort of how would you characterize that in terms of where the weakness was coming from?

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

Well we had another good ACQUITY quarter, so I wouldn't say that there is any sign that ACQUITY penetration is slowing down. But, overall I'd say you did see a better mix of Alliance and ACQUITY in the quarter, and in that -- in some of those traditional Asian pharma accounts that are more weighted towards Alliance and ACQUITY.

Ross Muken - Deutsche Bank Securities, Inc.

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

John Ornell - Vice President, Finance and Administration and Chief Financial Officer

Yes.

Ross Muken - Deutsche Bank Securities, Inc.

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

John Ornell - Vice President, Finance and Administration and Chief Financial Officer

Yes. I would say -- I mean 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, 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've held back a little bit on spend on that side, had some favorable mix on service plans.

I'd say our product mix was different than we had originally thought, as Doug alluded to, a little bit higher volume of Alliance vis-à-vis ACQUITY 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 as -- you're right, euro was up 15%, the yen was up 13%, and the pound was relatively flat, so it was the opposite situation that we saw as we came into the year last year.

Ross Muken - Deutsche Bank Securities, Inc.

And one quick maintenance question on share repurchase?

John Ornell - Vice President, Finance and Administration and Chief Financial Officer

Yes.

Ross Muken - Deutsche Bank Securities, Inc.

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

John Ornell - Vice President, Finance and Administration and Chief Financial Officer

Yes, 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. So we have significant amount remaining in the program.

Ross Muken - Deutsche Bank Securities, Inc.

Okay, perfect. Thanks guys.

John Ornell - Vice President, Finance and Administration and Chief Financial Officer

You're welcome.

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

Welcome.

Operator

Quintin Lai with Robert W. Baird.

Quintin Lai - Robert W. Baird

Hi. Good morning. When you looked at some of the change, I guess, in big pharma spending and you said that, it looks 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?

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

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 factored into the production plan for the next two quarters. And since we enter this quarter with a little bit more inventory than we had originally planned, we will 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, and -- but you can expect that our production plan for the next two quarters is been revised a little down from our original expectations for the year.

Quintin Lai - Robert W. Baird

And then, I guess, has it -- so you said that that the optimism is somewhat there. What changed from, I guess, the first quarter and delays of spending to now where you're starting to see a pickup?

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

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's coming through that request for quotation, attendance at seminars, because it can be a leading indicator, it can be a false indicator. So I'd say we continue to see very real interests from those large accounts. But of course, we are reading the same things that you are about a number of those accounts facing difficult times. Now, whether those difficult times mean that they'll significantly cut back on strategic R&D programs or not, we've -- we continue to believe that that's not the end result in this industry, that they've 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 have seen is a continuation of interest on those accounts, a number of the large tenders that we thought we'd 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'd say the net result of all of that is that we are a little bit more optimistic about going into the second quarter than the results we saw in the first quarter.

Quintin Lai - Robert W. Baird

Last question and I'll jump back into the queue. So, is it possible to decouple, I guess big pharma specific spending versus sales cycle and competitive dynamics. Has anything changed as from the competitive landscape that would have lengthened out a sales cycle?

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

Now I understand it's a fair question to see -- to ask what we are seeing on the competitive front, but we are not -- none of what we saw in the first quarter was the result of any substantial losses that we saw in those accounts. I'd say, overwhelmingly, it's delays versus lost business. We are not seeing any competitive thrust particularly against things like ACQUITY, particularly in things like the high-end research-grade mass spectrometers. If anything, I'd say, we are even more confident about our strategic positions technologically. So I am not seeing any significant penetration in our traditional dominant account.

Quintin Lai - Robert W. Baird

Thank you.

Operator

Tycho Peterson with J.P. Morgan.

Tycho Peterson - J.P. Morgan Securities

Hi. Good morning.

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

Good morning.

Tycho Peterson - J.P. Morgan Securities

Doug, wondering if actually you can talk a little bit about the academic market, we've seen some mixed signals there as well. So if you can just give us a sense as to what you're hearing from your academic customers, it'd be helpful.

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

Sure. And maybe, John, you can specifically cite the --

John Ornell - Vice President, Finance and Administration and Chief Financial Officer

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

Tycho Peterson - J.P. Morgan Securities

Okay. And then as we think about the product cycles here, can you just 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 different value proposition for your customers?

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

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

Tycho Peterson - J.P. Morgan Securities

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

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

Yes, sure. And 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, and some of it calendar, some of it just may be the way our large accounts started off the year, we saw almost across geographies without characterizes calendar delays. Easter falling in the first quarter affected us to a -- to an extent 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 --

John Ornell - Vice President, Finance and Administration and Chief Financial Officer

Calendar.

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

What we grossly call calendar effects. So, we think it clearly affected the run rate in the service, in chemistry business, where we are pretty confident that that's an unusual dynamic. We are not seeing any of that as we move through the second quarter.

Tycho Peterson - J.P. Morgan Securities

Okay. Thank you very much.

Operator

Jonathan Groberg with Merrill Lynch.

Jonathan Groberg - Merrill Lynch

Hi, good morning. Thanks for taking the call.

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

Good morning.

John Ornell - Vice President, Finance and Administration and Chief Financial Officer

Hi Jonathan.

Jonathan Groberg - Merrill Lynch

Can you just -- as I look at the numbers geographically that you gave again, I mean, the U.S. seem to be okay, you said plus 9% and seems like really -- I mean there are some of the issues going in Japan, but Europe seemed to be the one that was kind of the most sluggish at minus 2%. Can you maybe just elaborate on what explanation you're hearing from customers? What your sales people are telling you is going on there?

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

Yes. I would say most of the -- you are right. I mean 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 in standard currency terms, or local currency terms, translated it obviously grew significantly better. But I would say it was mostly a pharmaceutical dynamic, mostly a larger pharma dynamic.

Again we are seeing anticipated better results as we enter the second quarter. We are 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 as we think it takes them longer to get their budgets booked. They wait a little longer in the year before they are releasing some of their more significant investments. That seems to be happening as we're speaking. So, again that's one of the reasons why we're a little more confident as we proceed though the year.

Jonathan Groberg - Merrill Lynch

I mean is there any sense after two pretty 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, or -- I am just curious if it's -- there's a bit of a product cycle?

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

I would say, we don't see any sign of that, Jonathan. If you look at where you might look for that "levels," attendance at our seminars, the in -- 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.

Jonathan Groberg - Merrill Lynch

Okay. And then, again going back to kind of the guidance you gave at the beginning of the year, and then low -- revenues that were lower, I mean, currency adjust [ph], I guess, were not much a -- were just a percent lower, but organically lower. Can you talk about some of the things you did intra-quarter to deliver on the earnings that you talked about? So I am just -- did you realize half way through the quarter that, hey, maybe the organic sales wasn't going to be quite what we thought. And you did some things intra-quarter to make sure that you could deliver the strong free cash flow and earnings, just -- again I am taking the guidance on what you're expecting for gross margins, and operating expenses and --

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

Sure. I mean I -- we're -- we tried to draw in our internal forecast and our external forecast somewhat of a middle line of -- between possible -- 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 are not all that different from a lot of companies, and we are 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 -- we'd 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 better performance. In some quarters, two out of three hit, and sometimes, three out of three hit. I'd say this quarter, we saw very good performance out of those manufacturing programs. I think the good part about that is they'll continue to keep contributing for the rest of the year, and we are confident about that.

So, I don't think it's all on the margin, I'd say. 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 a bit favorable to us because of the Alliance ACQUITY mix. And currency 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.

Jonathan Groberg - Merrill Lynch

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

Last question. Can you just, John or Doug, maybe, explain why you raised the debt, and can you maybe give me a feel as to what you are paying on average for your debt versus what you are receiving on cash? Maybe all your cash is overseas and Europe's are getting higher rates than what you're expecting?

John Ornell - Vice President, Finance and Administration and Chief Financial Officer

That's right. I mean we had an opportunity when we put the original revolver in place to go back and up that with the bags in the consortium. And we've 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 are currently paying about LIBOR plus 60 or so basis points on the debt. And you are right; most of our currency is invested overseas --

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

Of our investments.

John Ornell - Vice President, Finance and Administration and Chief Financial Officer

On the investment side, right. So, there's a probably a 60, 70 basis point differential between debt costs and interest though -- that we are receiving on our investments net. Obviously, our investments are incredibly conservative in this day and age. No SIVs or CDOs or anything like that, we've got very safe AAA investments on cash invested.

Jonathan Groberg - Merrill Lynch

Great, thanks.

John Ornell - Vice President, Finance and Administration and Chief Financial Officer

Yes.

Operator

Derik deBruin with UBS.

Derik deBruin - UBS (US)

Hi, good morning.

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

Good morning Derik.

Derik deBruin - UBS (US)

Doug, correct me if I am wrong, but you basically had a 1 point or a little bit more than that tailwinds organic growth from 4Q, SYNAPT sales that basically didn't ship in 4Q. So now, given that with this tailwind and only a 9% organic growth comp again -- up against 1Q '07, why are you confident that you can hit your implied organic growth number of 7% to 9% in 2Q when you are facing a much more difficult 13% organic comp? I just basically know it's like why isn't this a repeat of 2005.

John Ornell - Vice President, Finance and Administration and Chief Financial Officer

Yes, I think -- I mean if you look at the guidance that 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 are looking for perhaps 6 to 7 organic growth in the second quarter. So comparable growth I'd say to what we saw in the first quarter and that -- the assets 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.

Derik deBruin - UBS (US)

Okay. So when you talk about having more confidence, I guess, are your -- is your feeling coming from the pharma purchasing managers, or is it coming from the people at the lab bench? I mean we've seen it in the past where we -- 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?

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

Well, I'd say we're not confident enough to take our expectations up significantly over what we saw in the first quarter. I'd say 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. But, it's -- it's early to tell, indications are positive right now, but we've got a long way to go, and we're comfortable with where we're positioning things right now.

Derik deBruin - UBS (US)

Great. Thank you.

Operator

John Sullivan with Leerink Swann.

John L. Sullivan, CFA - Leerink Swann & Company

Hey guys, good morning.

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

Good morning, John.

John L. Sullivan, CFA - Leerink Swann & Company

A couple of quick ones. One bright point in the fourth quarter was some multi-system orders of ACQUITY that you saw, and then in the first quarter, you -- you've 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 ACQUITY should be expected to be going forward?

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

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've seen the struggles that a number of these accounts have had, and I think they started off the year conservatively; whether they'll continue or not, I think is a fair question, but I don't -- we haven't seen any reduced interest in ACQUITY 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.

John L. Sullivan, CFA - Leerink Swann & Company

And just on that, are you still confident that over a longer period of time you'll see Alliance -- I'm sorry you'll see ACQUITY migrate more into the pharma QA/QC setting?

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

Yes.

John L. Sullivan, CFA - Leerink Swann & Company

Okay. And then lastly regarding your mass spec 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 that you're not seeing that as a primary driver?

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

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

John L. Sullivan, CFA - Leerink Swann & Company

Thanks so much.

Operator

Tycho Peterson with J.P. Morgan.

Tycho Peterson - J.P. Morgan Securities

Hi. Thanks for taking the follow-up. Just, John if you could 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?

John Ornell - Vice President, Finance and Administration and Chief Financial Officer

Yes. I'd say if you look at the first manufacturing pieces, they've got the lower manufacturing spend in the quarter as we've kind of held some headcounts 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's approaching a third of the improvement. Product mix as we look at the Alliance versus ACQUITY, we look at the low-end of mass spec not doing as well as the tops and triples, providing some favorable mix. That's probably -- maybe that's a third, maybe not approaching a third, but somewhere near that.

And then the remainder is currency, that's probably a strong third with -- 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's completely reversed and the pound is relatively flat and the yen and euro were up. So pretty consistent into -- consistent amounts across, I'd say, those three buckets and you will see much of that continue as we make our way into the second quarter.

Tycho Peterson - J.P. Morgan Securities

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

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

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

Tycho Peterson - J.P. Morgan Securities

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

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

Well we -- I'd say, of note is the interest in environmental and food safety applications particularly in Asia. Boy, we're -- we are seeing groups of interested Asian customers come through our Milford headquarters looking -- and across the product line, looking at data, looking at mass spec, looking at UPLC. A huge amount of interest and I'd say that's probably the most interesting aspect. It's also true that we're seeing interest in North America, but I'd say it's overwhelmed by the amount of interest coming out of Asia.

Tycho Peterson - J.P. Morgan Securities

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

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

It's coming -- 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's significant just in the quarter-to-quarter dynamics that we saw in the first quarter.

Overall, Japan had 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 will see Japan's results turn into more normalized growth.

Tycho Peterson - J.P. Morgan Securities

Okay, great. Thanks for the taking the follow-up questions.

Operator

Steven Solomon with Aroslyn Advisor [ph].

Unidentified Analyst

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

John Ornell - Vice President, Finance and Administration and Chief Financial Officer

Yes, I think it was probably 2 to 3 percentage points of impact would be my guess. And I'd also say if we 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, it could have been a couple of points as well. So I -- as Doug had said, as we started the second quarter, we saw that come back with a vengeance. So I think -- I think on a full year basis, we're probably going to be quite happy with the chemistry results.

Unidentified Analyst

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

John Ornell - Vice President, Finance and Administration and Chief Financial Officer

Yes.

Unidentified Analyst

Okay. Thank you.

John Ornell - Vice President, Finance and Administration and Chief Financial Officer

Welcome.

Operator

[Operator Instructions]. Sir, at this time, I show no further questions.

Douglas A. Berthiaume - Chairman, President and Chief Executive Officer

Well, thank you operator. And we appreciate you all taking the time and we look forward to talking to you again next quarter.

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