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Beckman Coulter Inc. (NYSE:BEC)

Q1 2008 Earnings Call

April 30 2008 8:30 am ET

Executives

Scott Garrett - Chairman, President and CEO

Charlie Slacik - SVP and CFO

Allan Harris - Director IR

Analysts

Quintin Lai - Robert W. Baird

David Lewis - Morgan Stanley

Bruce Cranna - Leerink Swann

Sara Michelmore - Cowen

Jon Wood - Banc of America Securities

Bill Quirk - Piper Jaffray

Jeff Frelick - Lazard Capital

Peter Lawson - Thomas Weisel Partners

Bruce Jackson - RBC Capital Markets

David Chung - Lehman Brothers

Operator

Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to Beckman Coulter's first quarter 2008 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. (Operator Instructions)

I will now turn the call over to Mr. Allan Harris, Director Investor Relations. Please go ahead, Sir.

Allan Harris

Good morning and welcome to the Beckman Coulter first quarter 2008 conference call. On our call today are Scott Garrett, Chairman, President and Chief Executive Officer, and Charlie Slacik, Senior Vice President and Chief Financial Officer.

Before we begin I want to remind you, that our comments today will include statements relating to our future results including the financial outlook, and expectations for 2008 and other market, business, and product trends that are forward-looking statements, within the meaning of Section 21-E of the Securities and Exchange Act of 1934. The company undertakes no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise. They are based on the company's current expectations and are subject to a number of risks and uncertainties.

Actual results could differ materially from those projected in any forward-looking statement as a result of certain risks and uncertainties including, but not limited to, those noted in our earnings release, our Form 10-K for the year end 2007, and other filings with the SEC. I direct you to those documents. This presentation also includes a number of non-GAAP financial measures. An explanation of these non-GAAP measures is provided in the company's earnings release and our Form 8-K furnished to the SEC today, both of which are posted in the investor section of the company's web site at beckmancoulter.com.

And now with our prepared comments, here's Scott.

Scott Garrett

Good morning, and thanks for joining us today. Our results for the first quarter of 2008 were solid and position us well to achieve our goals for the year. Let me begin by reminding you of the four drivers of growth and value that I find most important for or business and our industry, the installed base, geographic expansion, new technologies, and the advantages of market leadership. No 1, refreshing and expanding our broad installed base of instruments. A healthy and growing instrument base enables the sales of high margin test kits and assures recurring revenue growth.

No 2, winning customers in faster growing emerging markets, rapid economic growth in emerging markets around the world creates greater demand for healthcare, supports greater investment in healthcare infrastructure, and accelerates the growth of clinical testing. No 3, acquiring and deploying new technologies, and new tests, we are well positioned to apply breakthroughs from Life Science research and innovations from engineering, further differentiating our products, enhancing quality, expanding our test menu, and enabling entry into adjacent markets. No 4, building our leadership positions, product breadth, depth, and great brands are essential elements of leadership.

Beckman Coulter's systems are among the top alternatives for the vast majority of laboratory disciplines. Our substantial scale in clinical diagnostics allows us to leverage operating expense and create capacity to invest in promising products, technologies, and geographic markets.

As I review first quarter results today, I will emphasize four key indicators demonstrating the continued strength of our business. First, robust revenue growth, well above market rates, total revenue gains were driven by impressive sales of new instruments. Total revenue increased 19%, while recurring revenue, the sum of kits, supplies, service, and lease payments maintained its steady momentum, growing nearly 13%. We are expanding our broad installed base which translates directly to growing market share.

Second, immunoassay momentum; share gains continue, immunoassay revenue increased by 23% more than three times the market rate. Third, growth in China, India and other emerging markets, revenue in these markets increased more than 50% in the quarter as we made good use of the weak dollar, aggressively developing our presence in these rapidly expanding healthcare systems. And fourth, operating excellence, we were able to deliver on our earnings expectations while accelerating investments for the future; expanding our presence in emerging markets; integrating our recent flow cytometry acquisition, adding new work cells, and developing our molecular diagnostics, and next generation hematology systems.

Now as I begin a more detailed summary, I will describe first quarter revenue on an as-reported basis, unless otherwise noted. As I mentioned total revenue was $730 million up 19% over first quarter 2007. In constant currency up 14.5%, clinical diagnostics revenue increased 19.2% over prior year or 14.8% in constant currency. Revenue from Life Science products rebounded strongly, demonstrating exceptional growth in the quarter, increasing about 18%, nearly 13% in constant currency.

Product revenue in Life Science, and to a lesser extent Clinical Diagnostics, benefited from robust cash instrument sales, which in total were up 50% over prior year quarter. The high growth rate in cash instrument sales results from a relatively weak instrument sales comparison in first quarter 2007 versus truly strong sales in first quarter 2008. Q1 results are encouraging, but our outlook for Life Science's revenue continues to be realistic. This is the first quarter of real growth in sometime. Instrument placements were also robust in cellular analysis, hematology and flow cytometry instruments sales increased by more than 50%.

We continued to catch up with our production backlog, fueled by strong demand over the last several quarters. Instruments sales in China, India, and other emerging markets more than doubled as we took advantage of the weak dollar to aggressively expand our installed base of instruments in these promising markets. This investment in the installed base in sales and service infrastructure should drive long-term growth. We anticipate rapid growth of test kits, following the expansion of the installed base.

Recurring revenue growth which demonstrates the overall strength and stability of our business was up nearly 13% consistent with 2007 growth rates. Recurring revenue growth reflects the combined effect of expanding our installed base and increasing its utilization of test kits and service. Customer requirements for productivity enhancements drive in demand for our highly efficient systems, and new and improved tests increased utilization. Recurring revenue in chemistry and immunoassay was especially encouraging. Recurring revenue was up over 22% in the access family of immunoassay systems while auto chemistry was up nearly 14%. Both grew at two to three times the market rate.

Now I will summarize first quarter revenue results by geography. First, the United States, while many investors have speculated that the tightening in credit markets would slow capital spending in US hospitals, our robust growth, in fact, strongly suggests that we are not experiencing difficulties related to these issues. This should come as no surprise because since our conversion to operating type leases, the vast majority of our laboratory customers lease instruments and acquire test kits through their operating budget and are, therefore, largely insulated from capital spending constraints.

Laboratories continue to focus on overall quality, process efficiency and patient safety in their operations as they contend with labor shortages, managing labor cost and growing outreach testing volumes. Beckman Coulter's broad product offering, with leadership and productivity enhancing automation and work cells, is especially attractive in this environment. Simply stated, highly productive laboratories are essential to highly productive hospitals. Strong demand was demonstrated in the quarter by double-digit revenue growth in the United States, in both Diagnostics and Life Sciences.

Outside the United States, we capitalized on a weak dollar to rapidly increase our market penetration. In describing our international results all trends will be stated in constant currency. International revenue was up over 19%. Revenue from Asia Pacific rose more than 35% with both Life Science and Clinical Diagnostics performing well. Immunoassay growth in Asia Pacific was especially impressive, exceeding 50%.

Revenue in Europe rose 7.4%, led by growth in Clinical Diagnostics, up more than 9%. Automation and works cells are becoming a key factor in our European success. Automation revenue more than doubled in the region, while interest is high in building for our new work cell, the high-volume DxC 880i.

Now, I will address revenue by product area. Please note that we have changed our product buying reporting. Certain products most notably clinical lab automation have been moved from the Discovery and Automation product area to provide greater visibility to Life Science and Diagnostic product trends. A schedule providing the new revenue segmentation is included in today's earnings release.

In Chemistry and Clinical Automation, revenue increased 17% in the quarter on solid performance across each of our major geographic regions as our DxC family of Auto Chemistry Systems continued displacing competitive systems. Sales in international markets were especially strong, growing 26% or 16% in constant currency. In the first quarter, we remained on pace to achieve a fourth consecutive record year of Auto Chemistry placements, growing our installed base in mid to large sized hospitals and driving increased utilization of chemistry test kits.

Also, Clinical Lab Automation sales grew 28%, signaling continued strong interest in our broad offering of productivity enhancing systems. Our market leading line of automation creates an important strategic advantage for Beckman Coulter. Automation enhances customer relationships for many years after the system is installed, providing opportunities to continuously expand the number of Beckman Coulter analytical systems on the automation line and growing the volume of high-value test kits.

In Molecular Diagnostics product area, immunoassay revenue was up 23% worldwide with above market double-digit growth across all major geographies. Sales in international markets grew nearly 40% or 29% in constant currency. Recurring revenue for our automated access immunoassay systems maintained great momentum, up 22%. Beckman Coulter continues to be a leader in work cell solutions with unit placements up more than 50% in the quarter. Our work cells combine the full menu of chemistry and immunoassay tests into consolidated systems that bring higher levels of productivity, quality, and patient lab tech safety to the laboratory.

We commercialized the DxC 880i late in the quarter. The DxC 880i combines Beckman Coulter's highest volume chemistry system with the highest throughput immunoassay instrument, and will be a significant driver of improved productivity in larger hospital laboratories. We also continue to make solid progress in the development of our sample to result Molecular Diagnostics instrument, securing important intellectual properties for a critical test we anticipate including on the launch menu. We obtained certain rights which will allow us to provide a hepatitis C viral load test, a high-volume high-value assay that our customers are anxious to perform in their labs.

Revenue in the Cellular Products area increased 19%, led by sales of flow cytometry and hematology. Our 2007 acquisition of Dako's flow cytometry business added 3.1% to this growth. International sales led by China, India, and other emerging markets grew nearly 27%, approximately 18% in constant currency. Heightened instrument shipments and cellular were partially the result of an increase in the production plan, helping us to overcome the previously announced supply chain disruption. We anticipate that this elevated level of cellular instrument shipments will extend to least into the second quarter.

In hematology, we remain on schedule to commercialize our next-generation system, the DxH 800, targeted for introduction in the second half of the year. Initial feedback from beta sites has been quite encouraging. In Life Sciences, sales grew about 18% worldwide. Strong instrument placements in Life Sciences was a primary driver of a $52 million increase in cash instrument sales for the company against a relatively flat first quarter 2007.

Beckman Coulter extended meaningful positions in centrifugation and Life Science automation in the period. Both grew in excess of 20% while our market-leading Capillary Electrophoresis products gained significant placements. Centrifugation and Life Science tools categories experienced considerable gains in emerging markets, fueled by growing laboratory infrastructure and a weak dollar. All in all we certainly built a strong foundation upon which to fuel our future growth.

Now I will turn it over to Charlie Slacik, who will comment on the P&L and other financial results. Charlie.

Charlie Slacik

Thank you Scott, and good morning everyone. A full description of the company's first quarter results is provided in today's earnings release. As Scott has already discussed, we achieved excellent top-line growth in the quarter.

Over the past year, we have been talking to you more and more about recurring revenue. As we have shifted from STLs to OTLs, we believe that the recurring revenue is a better growth metric than consumables since it provides better insight into both increased test kit utilization and the growing installed base. Recurring revenue in Q1 grew 12.8%, sustaining a healthy trajectory. This growth compares well with the 12.9% pace we saw in the first quarter of 2007.

Turning to gross margin, compared to first quarter 2007, gross margin declined about 260 basis points to 45.9%. I'd like to point out that this gross margin level is just about the same as the second quarter of 2007, when we also booked unusually heavy instrument shipments. As Scott indicated, the spike in instrument sales this quarter was caused by three things. Unusually high demand in the first quarter coupled with weak instrument sales in the comparable period last year to. 2; our continuing efforts to catch up with cellular production backlog while experiencing heightened demand for cellular instruments; and 3; our efforts to actively expand our installed base in international markets.

This growth outside the United States put pressure on gross margins for a couple of reasons. In the early stages of market development, the mix usually favors hardware and large tenders where margins are usually lower and too, above normal growth in dealer markets while pressure in gross margins provides comparable levels of operating income since our dealers bear the operating expenses. While this investment in our international installed base put pressure on our margins in this quarter, our long-term objective is to increase our penetration in emerging markets to drive future recurring revenue growth.

In both emerging and developed markets, the higher level of instrument placements pushed up service costs, due to the increased volume of installations. This was a key factor behind our 20% increase in service cost during the quarter. Net, net we saw a healthy demand for instruments and we look for two strong sales of test kits going forward, which should result in growth in higher margin recurring revenue.

Moving down the P&L, from here on my comments will be based on adjusted results, which are detailed in the earnings release.

Operating income was $70 million, a 9% increase over the same period in 2007. Operating income margin decreased 90 basis points from 2007 to 9.6%. The decrease in operating margin was driven entirely by the impact of a higher instrument mix in the gross profit. Operating expenses grew by about 14% due to overseas growth, and sales and marketing expenses picked up with the Dako cytometry products. A good portion of the R&D increase was due to the roughly $4 million increase in spending on our Molecular Diagnostics development project. In 2007, the program was still ramping up but we have now reached a more level run-rate.

We were also able to continue funding our workcell, and next generation hematology projects for success. Our operating income for Q1 was negatively impacted by the acquisition of Dako's flow cytometry business and by a change in the vesting terms of newly issued stock-based grants. These two factors trimmed $3.9 million and $4.6 million from pretax income, respectively. The company's EBITDA performance has been improving steadily since we shifted from operating type leases and phased out sales type leases.

As OTL assets have built over the last two years, depreciation and amortization have been closing the gap with our CapEx. In the first quarter, our 2008 D&A grew over 22% versus 2007 while our CapEx was flat. At the end of March, our trailing 12 month EBITDA was $554 billion, by comparison as of March 31, 2007, trailing 12-month EBITDA was $498 million, this is an 11% increase. We expect this positive EBITDA trend to continue.

Turning to taxes, the rate in the first quarter was 24.7% up from 23.6% in the first quarter of 2007 the rate was affected by discrete items during the quarter which we don't expect to recur. Net earnings for the first quarter were $44 million or $0.68 per fully diluted share. Again, dilution from our flow cytometry acquisition was approximately $0.04 in the quarter. We expect the acquisition of a neutral impact over the remainder of the year.

On key balance sheet metrics, our accounts receivable DSO increased two days and inventory turns were about flat. Operating cash flow for the first quarter was $62 million, or $8 million below the prior year, due primarily to higher inventory levels; and this will be a key area of focus during the balance of the year. Based on our encouraging first quarter performance and currency exchange rates, we are raising our full year revenue outlook. Assuming stable currency, full year revenue growth should be in the range of 11 to 13%. 2008 operating margin is expected to be between 12% and 12.5%.

The outlook for non-operating expense is $12 million to $13 million per quarter. Pretax profit growth should be 12 to 15% with a tax rate of between 29 and 30%. We are raising the low end of our outlook for earnings per diluted share and consequently, we now expect our EPS to be between $3.55 and $3.65, based on a share count of about 64.5 million shares. EBITDA for the full year 2008 should be between $580 million and $630 million. CapEx is expected to be between $290 million and $310 million and D&A should be between $240 million and $260 million.

And now I will turn things back to, Scott.

Scott Garrett

Thank you, Charlie. I'm encouraged by our success in the first quarter, expanding our installed base, increasing our investment in key projects, and delivering on our earnings targets. We also made significant progress integrating our flow cytometry acquisition, advancing our supply chain initiatives, and further positioning our core business for long-term success.

Our supply chain initiatives continue to cross many areas of the company, complemented by our focus on Lean Six Sigma. We are demonstrating progress from Lean initiatives, as we optimize our footprint in order to reduce our cost structure. We expect a complete relocation of our Palo Alto, California operations, to Indianapolis, Indiana by the end of 2008.During the quarter, we continued to make progress by completing the reduction of our US distribution centers from five down to two and we kicked off the Orange County facilities consolidation project. We expect to share additional details of our Lean programs with you throughout the year.

As we optimize our operations, we continue to significantly outperform the market in Clinical Diagnostics, with strength coming from great products, consultative selling, responsive service and automation leadership. We remain focused on creating shareholder value through growth, quality and operating excellence. Our priorities include sustaining rapid growth in immunoassay; extending our automation leadership; developing our samples to result Molecular Diagnostic system; developing and commercializing three additional workcells and our next generation Hematology system; and achieving still greater efficiencies and operating excellence throughout our operations.

Charlie and I are now prepared to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from Quintin Lai with Robert W. Baird.

Scott Garrett

Good morning, Quintin.

Quintin Lai - Robert W. Baird

Good morning, nice quarter.

Scott Garrett

Thank you.

Quintin Lai - Robert W. Baird

As you take a look at the hospital environment and thank you for the color, Scott. I am talking about the strength that you are seeing so far, and your new guidance earlier in the morning. What about some of the larger projects, things that where hospitals have retransformed their labs and broken down walls and brought in new automation.

Are you getting any good visibility on those types of projects and the capital spend from some of your customers and in particular automation for you those tend to be cash sales? What are you seeing with respect to the order flow for that?

Scott Garrett

It continues to be quite strong. We have been pacing our automation based on our capacity to do installations, and as you suggested Quintin, often times our major hospital customers will look at the automation installation, the same way they look at putting a new wing on the hospital. It's part of an overall capital program. And we often get paid cash even if they are financing otherwise. You may have noticed that the major hospitals and hospital groups around the country in the United States are really doing quite well financially.

We've had great relationships with many of these big integrated health networks. They tend to be regional, they tend to do a great job of maintaining a highly productive hospital and we've been able to help them in making their labs more productive. But they seem to be financially doing quite well financially. And we haven't seen any impact in this quarter or fourth quarter of last year from what I think is often described as the overall credit crunch that the country is going through.

Quintin Lai - Robert W. Baird

Thank you for that. And then, second question and I'll jump back into queue. Nice growth in emerging markets, servicing those areas can be an issue. How do you handle that, do you have to build the service in front of these orders or do you expand the service as you get these orders? And how easy is it for you to get that infrastructure in place?

Scott Garrett

Of course we, yeah okay...

Charlie Slacik

Yes, it's always a challenge in a balance, we try to anticipate the growth and build the infrastructure. We use a combination of dealers and direct. A good example, recently is our business in Turkey, where business tends to come in large tenders, government tenders, which is a contract offering, a competitive situation where the contract is offered to several suppliers and you can win literally 100% market share of a given province or region. And we shipped out dozens of immunoassay analyzers in the first quarter because, we won that tender.

These are relatively low margin for the hardware but they'll set us up very well in the future with significant market share and the pull through of the high margin test kits. So we are making investments in these emerging markets, trying to anticipate the growth. But sometimes it's going to come in a bolus as recently in Turkey. And we rely on our dealers to help us with the service infrastructure. But we're also putting more and more direct people into those emerging markets.

Quintin Lai - Robert W. Baird

And do you feel that gives you a competitive advantage because then once you get the toehold and get increased market share, then you have a bigger service infrastructure, which means that, you theoretically can leverage the next incremental account?

Scott Garrett

Absolutely right, as we attain scale in these emerging markets, we begin to generate some of the advantages of leadership, including being able to leverage our service cost, our selling expense. And we've got the power of incumbency as the next round of tenders or competition comes up. So yeah, it's definitely an investment.

Quintin Lai - Robert W. Baird

Thank you.

Scott Garrett

Thanks, Quin.

Operator

Your next question will come from the line of David Lewis with Morgan Stanley.

Scott Garrett

Good morning, David.

David Lewis - Morgan Stanley

Good morning, how are you doing?

Scott Garrett

Just fine. How about you?

David Lewis - Morgan Stanley

Battling this humidity here down in Miami.

Scott Garrett

Then, I'll see you later.

David Lewis - Morgan Stanley

Absolutely. So Scott I wanted to focus on a question we talked about in the past that, obviously, you've been very clear over the last year that Beckman is going to take share both in the U. S. and both internationally by leveraging high quality systems, both modules and automation. Obviously, this is going to press your gross margin.

So I guess that's a question for Charlie or for yourself, internally what kind of metrics are you looking, at whether it'll be return on capital, downstream region pull through, profitability at the overall account, to be convinced that this aggressive investment over the last 24, and specifically last 12 to 18 months is going to pay off for shareholders an return on capital in the next 18 to 36 months?

Scott Garrett

We're looking it ahead to all the traditional financial metrics, and we we're looking ahead into the future. We've got great opportunities to improve this business. And we think it will show up very well in metrics like, return on invested capital, return on assets, and return on equity. In this current year, we've got very specific goals for operating margin. We've also got opportunities to continue to grow our business in emerging markets which requires investment.

But we think we can make those investments and deliver on our EPS growth. Longer term we want to have sustainable revenue, sustainable operating income growth which delivers the EPS and gives as the capacity to invest in further growth opportunities. I talked about Turkey already. Another opportunity that came up a little over a year ago was a big opportunity in Queensland, Australia, where we put automation, chemistry, immunoassay, and hematology into virtually all the government labs in Queensland, Australia.

The local P&L from Australia in that first year was not pretty, but we knew it was an investment, and now this year we are seeing terrific growth in our consumables, recurring revenue, test kits in that Queensland market. And it's going to pay off for many years to come. So we've got a relatively long time horizon that we want to make steady progress on traditional financial metrics. But we've got current period goals and we expect to hit them as we live along.

David Lewis - Morgan Stanley

That's very helpful color, thanks, Scott. So you are making a lot of progress here on the molecular system. Obviously one of the advantages of building out your infrastructure will be leveraging new products. With MRSA, with gonorrhea, chlamydia, and now Hep C, do you have enough content to be competitive or are you still one or two assays short on launch?

Scott Garrett

I think we are in very good shape in terms of a launch menu. And of course David, we look forward to expanding that menu very much in the way that our immunoassay menu expanded over the years. But I think we have all of the intellectual property we need right now, to have a very attractive offering at launch.

David Lewis - Morgan Stanley

Okay. Just one last question and I will jump back in the queue. On immunoassay, the growth there remains very robust and impressive. Do you have any sense of, if you could give us any kind of guidance on whether that growth is coming from acquisitions such as DSL and some of your initiatives around inhibit A, and how much it is coming from the aggressive market share gains you made in the last 24 months? If you could give us a percentage basis or any sort of qualitative color, that will be great.

Scott Garrett

Just on a qualitative basis, we've continued to grow our installed base in immunoassay. We've continued to add additional tests. In the United States, we've done a great job of penetrating the market, and believe in many panels literally disease states within that immunoassay menu. We have achieved leadership. In markets outside the US, we've got plenty of opportunities to continue to grow through more placements and better utilization.

So it's a combination of all of those things and we are really looking forward to the impact of the new works sales. As you know, the 880i was just released in February. We think in the second half of the year that will definitely be a factor in sustaining our immunoassay growth.

David Lewis - Morgan Stanley

Great. Well, thank you very much. I will see you tomorrow.

Scott Garrett

Thanks, David.

Operator

Your next question will come from the line of Bruce Cranna with Leerink Swann.

Scott Garrett

Good morning, Bruce.

Bruce Cranna - Leerink Swann

Hey, good morning, guys. Charlie, first of all would it be possible maybe to talk about gross margins, the impact by those, the three pieces you mentioned the backlog effect and mix and OUS?

Charlie Slacik

Sure. Maybe just to get little granular on gross margins for the quarter here's a few things I could add to, maybe I'll color to this. Overall when we look at the components that make up gross margin, we can tell you that overall hardware margins themselves actually improved over prior year, partially due to mix because a lot of the hardware would be in Life Science products which has a higher margin than, say, diagnostic instrument sales.

So, overall, hardware margin is actually up versus prior year. Within that, I think as we have said in the past, the only area where we see any competition that would impact pricing at all would be in hematology ongoing competitive situation continues. But overall, even when that's taken into account, hardware margins are still up. Looking at other components like, reagents, country-by-country, no significant changes in our gross margins there.

But if you look at continuing in the mix mode, if you look at the OUS versus US and European growth, clearly the larger growth rate came in emerging markets as opposed to the more mature markets like US and Western Europe. So in those areas, margin is a little lower and that would pull down our average relative to mix. And clearly as you could see, the hardware mix versus last year went from 22% of our revenue last year in the quarter to 27% this year.

So, but that obviously had a lot to do with the margin. And when we look at the results for Q1, personally, I don't get too alarmed because as I look at the gross margin for Q1 and we look back at prior year, we saw something very similar last year. If anything the way we look at this is the Q1 and Q2 this year is probably more like a flip-flop of last year. In the Q1 of last year, we were very light in hardware, but had a huge increase in Q2.

And when we look at the Q2 gross margin last year per this year, we see they are very comparable. I think actually this year is up about 10 basis points to 46 from 45.9 last year. So it's not alarming, as we look at not only the components of the gross margin, as well as the macro overall look, it doesn't demonstrate any reduction in prices. It's just a slight change in mix.

And I guessed lastly, as we look towards the rest of the year just as we did last year, when we move forward from Q2 we see the gross margin normalizing.

Bruce Cranna - Leerink Swann

And Charlie, what kind of tax rate should we be thinking about going forward?

Charlie Slacik

At the beginning of the year, we said 30% to 31% and for the first quarter you could see it came in below that because of discrete items. But what you could do then is just imply that the original rate would apply for the balance of the three quarters, which would bring in for the full year at 29% to 30%.

Bruce Cranna - Leerink Swann

Okay. Scott, the growth in cash instrument sales is really quite remarkable. Is there any chance you could talk a little bit about trends there, US versus OUS, I mean is it a fair assumption to assume that rates of growth there are stronger OUS than US?

Scott Garrett

Yes, I think Charlie detailed the sources of those cash sales. And certainly, the rebound that we got in Life Sciences, literally around the world was a big factor. And then in addition to that, we had, again as Charlie mentioned, terrific sales in emerging markets which tend to be dominated by cash sales to dealers. So that combination gave us a real boost.

The third factor was the continuing strength of our hematology shipments. As you remember we had some production disruptions in the second half of '07. We resolved those completely in the fourth quarter last year. We satisfied our customers, made our planned number of shipments. But as demand continued to be strong, we continued to have a backlog. Very strong shipments of hematology in the first quarter, we think that can continue into the second quarter. So those are the key elements of the cash sales.

Bruce Cranna - Leerink Swann

But really skewed towards OUS that growth, I would imagine?

Scott Garrett

Yes, OUS had a significant impact.

Bruce Cranna - Leerink Swann

And do you guys still refabricate at all?

Scott Garrett

We do some remanufacturing for Latin America primarily.

Bruce Cranna - Leerink Swann

And last from me, just so I am clear, the HCV license is just the amplified side of things, correct?

Scott Garrett

It's molecular or nucleic acid-based, yes.

Bruce Cranna - Leerink Swann

Yeah. Okay, thank you.

Scott Garrett

You're welcome.

Operator

Your next question will come from the line of Sara Michelmore with Cowen.

Scott Garrett

Good morning, Sara.

Sara Michelmore - Cowen

If you guys could just talk a little bit about the ebb and flow of the instruments, and maybe what we should look at in Q2? I mean typically if you have a strong instrument quarter it's, you may have a little bit lighter instrument quarter in Q2. I know, Charlie, I think referred to some of the dynamics with the cellular systems which you expect to continue to be strong through Q2. But if you could just talk about in general, what we should keep an eye out foregone?

Scott Garrett

Yes, I think the key expectation is that this was a very strong instrument quarter and it's not something that we would expect throughout the year. Charlie used the term normalizing, for the rest of the year and I think that is the way to look at it. We had a second quarter '07 that was kind of a spike in hardware, especially in cash sales.

We think that's pretty much what we had first quarter this year. And while we do expect to see continuing strong demand for instruments, we won't necessarily see the same level of cash sales. Charlie, anything you'd like to add to that?

Charlie Slacik

Sara, I think the only thing I would say is, I wouldn't take Q1 as a proxy for the full year and extrapolate for the full year. What I would do is, as I mentioned a little bit earlier, Q1 of this year as we analyze it is similar to the way we look at Q2 last year, a bolus happens sometimes for a lot of different reasons. But as we look forward for the rest of the year, we would see the mix of hardware returning to what a normalized level from last year would have looked like in terms of the mix.

Sara Michelmore - Cowen

And some of your key competitors, particularly in some of these more hardware heavy product lines have sort of changed their tune in terms of how they are managing their businesses. And I've heard the word managing for profitability kind of being thrown out by a handful of the people that you guys compete on a daily basis.

I wondering if you're seeing that at all, has that helped you at all in terms of new instrument placements, or has it affected pricing at all? What kind of opportunities does that probably create for you?

Scott Garrett

Look clearly we've had a lot of success in the first quarter and as we continue to have the opportunity to win new customers and take share with instrumentation placements, we'll continue to do so. But Sara, I think the market continues to be highly competitive. We've got very capable competitors in every one of our major product lines. They tend to be different competitors product line to product line. But this continues to be a tough business.

And I think we are beginning to see the strength of our product line, especially the differentiation we have, and our instruments begin to make a more and more significant difference and create advantages for us. We expect that that will continue. But again, we had a very strong first quarter and think that that will normalize throughout the year.

Sara Michelmore - Cowen

Yes. And then, so follow-up on emerging markets. I know you guys have been a little bit more aggressive particularly in Asia in terms of getting out there a bit. Who are you really competing with in some of the key emerging areas, is it local competitors or is it the same guys you run into in the US and Europe?

Scott Garrett

It's primarily the same global competitors in China and India, for the segments of the market that are really very interesting and attractive to us. Local competition does come in, usually in the smaller instrumentation segments. But we still have a lot of competition from Roche in chemistries around the world, from Sesmechs in hematology, from Abbott and Siemens in immunoassay. Those competitors show up just about everywhere we do.

Sara Michelmore - Cowen

Okay, that's helpful. Thank you.

Scott Garrett

You're welcome.

Operator

Your next question will come from the Jon Wood with Banc of America Securities.

Scott Garrett

Good morning, Jon. Hello?

Operator

Hello, Jon, your line is open. Please go ahead.

Jon Wood - Banc of America Securities

Hello, can you hear me?

Scott Garrett

Yes, Jon.

Jon Wood - Banc of America Securities

Okay, sorry. Good morning.

Scott Garrett

Morning.

Jon Wood - Banc of America Securities

Scott, why not disclose the installed base metrics, I mean it seems to me that would be an area to emphasize to investors and not hide given how robust the placements have been?

Scott Garrett

Yeah, I understand that it would be interesting. But to give you good information, information you could actually use on the installed base, we would have to give you details by segment. We've got five different sizes of hematology instruments. And we will have to differentiate between how many placements were $20,000 Docs office hematology analyzers versus $500,000 automation installations for major university medical centers. Same kind of depth applies to chemistry and immunoassay.

So if we were to give you meaningful installed base information, we would be giving our competitors just a wonderful road map to exactly where our business is.

Charlie Slacik

Yeah, Jon, this is Charlie. The only thing I would add to that is, the more we look at how we can make it meaningful for everybody, we come back to that reoccurring revenue number. And recognizing within that number the only thing that's in the Life Sciences primarily is just the service component. So the balance of that number really is what I call our base of business.

And so even though we might see revenue bounce around a little bit quarter-to-quarter because of cash sales of instruments, that recurring revenue number I think, really represents the best proxy for seeing where we're going in terms of base of business building, and what the pace of that is.

Jon Wood - Banc of America Securities

Okay. And so Charlie, I think you've talked consumables like in 2007 was the rate you talked about. Can you give us the constant currency recurring revenue number for the quarter?

Charlie Slacik

I think if you take about 4 percentage points out of the overall growth, you will get the constant currency. So we reported 12.8.

Scott Garrett

12.8.

Charlie Slacik

12.8%, if you had to take constant currency it's about between 8.5% and 9%. One of the reasons we like the metric is it really does demonstrate the gradual growth of that installed base. As we mentioned in the comments, last year Q1 revenue recurring revenue base grew 12.9%. For the whole year last year, if you looked at it, quarter-by-quarter, it grew each quarter somewhere between 11 and 13%.

So a very constant rate of growth which is what you would expect for a metric like that. So after last year,which grew at an average for all four quarters of 12.5%, and this year we started out the year growing it at 12.8%. So that really is, when we think about our base of business, that really is it, that recurring revenue dollar amount.

Scott Garrett

Consumables growth rates are just a little more difficult for us to compare because in an era now where operating type leases dominate, the transactions we have with our customers, we are really setting up a lease payment that covers all of the aspects of recurring revenue. And it becomes a somewhat artificial exercise to extract how much of that is really dedicated to the reagent kits.

So rather than spend a lot of time tried a few that out and waste precious resources and operating expenses, we think that recurring revenue is the right way to go. That's what our customers pay us, and I think that's what our investors ought to be most interested in.

Jon Wood - Banc of America Securities

Okay, great. And Scott, is the clinical diagnostic sales force, how is the compensation metrics base, is it just sales or is there an operating profit trigger in there as well?

Scott Garrett

There are many, many aspects to the incentive compensation program. And we have different areas of focus for different types of sales reps. We have some that are really concentrating on winning new business. We have some that are concentrating on adding to the utilization of the existing installed base. And each of those has bonus opportunities, incentive compensation opportunities based on their most important targets. So it is a very tailored-mix of incentives that we fine tune year after year, and try to keep our sales reps focused on the highest value activities that we can put them on.

Jon Wood - Banc of America Securities

Okay, and then one last one. You mentioned the competitiveness of the environment. Do you foresee a situation where pricing gets better now that days consolidated, once the disruption the market subsides, I mean is there an opportunity for a bit better pricing in this industry over the next several years?

Scott Garrett

I have been in this business for quite a while, and the long-term trend on pricing has always been in the down direction. Our opportunity will be to continue to provide highly differentiated systems and convince our customers that their productivity gains really will justify the higher margins that we get through our test kits. As our customers get better reimbursement from, literally, from governments, from insurance companies around the world, we do believe we will add more opportunity to move to higher gross profit new tests.

So it is our intention to be looking for more investment and market development which will include making the case for some of the novel new tests in immunoassay and in molecular diagnostics, commanding a higher level of reimbursement from the reimbursement authorities around the world. And then our customers will certainly be in the position to pay us the full value of what we are bringing them.

So I guess to really summarize, competition is sufficiently capable of maintaining pricing pressure around the world. And the opportunities to improve our margins will come from high margin, new tests and continuing efforts to improve our overall operating efficiency everywhere in our business system.

Jon Wood - Banc of America Securities

Okay. Thanks a lot.

Scott Garrett

You're welcome.

Operator

Your next question will come from Bill Quirk with Piper Jaffray.

Scott Garrett

Good morning, Bill.

Bill Quirk - Piper Jaffray

Good morning. Thanks for the color Scott, on worldwide competition. I was hoping we could bring the discussion back there just for a second, but specifically thinking about the US Are we seeing any impact based on some of the outpatient reimbursement deals with the payers and some of the labs out there, and whether or not that is having an effect on pricing with deals in the U.S?

Scott Garrett

I have not seen any impact or heard about that creating more pressure on our sales or margins. As I mentioned, the regional medical centers are doing very, very well. And I think they are the customers that have really figured out the importance of the outreach opportunity. We think we have minimal exposure to commercial lab competition. They are very important customers, but they don't make up a high percentage of our overall sales. And I think that's where the competition, you are referring to is probably taking place in large part.

Bill Quirk - Piper Jaffray

That's a very fair response. I guess, shifting the discussion outside the US to some of the emerging markets. I think for sometime, there's probably been a little bit of concern about potentially counterfeit reagents. Can you talk to us a little bit about the structure of these deals, obviously, you are seeing very strong instrumentation, but with those tenders do you end up getting a guaranteed reagent contract as well?

Scott Garrett

We have a very good technical tie-in between our instruments and our reagents. For example, in immunoassay and in our anticipated new product line in molecular, it would be literally impossible to do knock-offs. The capability to actually get a reagent on the market that has kind of the clinical data to back its release would be impossible to generate, unless you had the instrument capability, the software, etcetera so totally protected in immunoassay and molecular. There is an opportunity to do some of the chemistry reagents, and we've seen a little bit of competition in that area in China.

In hematology, we have the greatest part of the reagent gross profit comes in our control products, which are also very much proprietary and important to the overall performance of the instruments. When I think of all of the possible issues that could hurt us in these emerging markets, I don't worry about knock-off reagents. It's just not been a factor it comes up from time-to-time. But it's never been a major factor.

Bill Quirk - Piper Jaffray

Okay, very good. And then last question for me is one for Charlie here. Charlie, if we normalized Dako and obviously the adjustments to stock-based comp in the first quarter. Is it safe to say we should start to see some sector incremental leverage on the SG&A line over the balance of the year?

Charlie Slacik

Certainly, Bill. Yeah, the growth we saw in Q1 especially when you consider the stock-based compensation adjustment, which was just for the quarter, Dako. We saw a small level of sales since it has just acquired about a full load of expenses. Yes, we will see that SG&A moderate, especially relative to the sales growth.

Bill Quirk - Piper Jaffray

Okay. So I guess as we think about the balance of the year are there any other one-timers for a specific order that we should be thinking about?

Charlie Slacik

End loaded into the expense base? No, I can't think of anything that would cause it to be growing anything like what we saw in Q1.

Bill Quirk - Piper Jaffray

Okay, very good. Thank you.

Charlie Slacik

You're welcome.

Scott Garrett

You're welcome.

Operator

Your next question will come from the line of Jeff Frelick with Lazard Capital.

Scott Garrett

Good morning, Jeff.

Jeff Frelick - Lazard Capital

Hi, good morning, Scott. How should we think about test utilization per instruments into new accounts, let's say maybe year 1 versus year 3, either assays added as we go along or revenue growth, year 3 versus year 1?

Scott Garrett

Good question, with a different answer for every one of our product lines. So let's start with immunoassay. When we sell a big immunoassay analyzer, DxI 800 or 600, it's generally going into the lab as the primary analyzer. So the lab will for productivity reasons will want to run as many of the assays as possible on the DxI. If we start with an access 2 which is the benchtop analyzer immunoassay, a customer might be buying that just because they want to run our cardiac panel.

Then we have to go back in and kind of sell on an intramural basis all the other panels, and as we win more and more, we might convert that customer to a DxI 600 or 800. You don't win all the assays in immunoassay with the first instrument, you have to continue to go back and sell panel after panel. In chemistry, you tend to get all the routine tests, but you still need to go back after the therapeutic drug monitoring assays, the drugs of abuse, which a lot of hospital labs, a lot of our customers might run on a separate dedicated instrument. And we can run those more efficiently.

We can make that customer more productive if they move those tests over to the chemistry analyzer, I'd also include a protein test in that chemistry category. Then, in hematology, when you win the instrument contest you win all the reagents. There's not a lot of consolidation unless there are still some customers that might run two different brands in the same lab, but we see that less and less often. So, most of the time you are the primary hematology analyzer and you win. Now flow cytometry, which is becoming a more important part of our product offering, is a lot more like immunoassay.

In a clinical setting, the flow cytometer might go in for literally one test, might be AIDS monitoring. And then we need to continue to sell all of the other applications that could be done on that flow cytometry. So I hope that gives you a feeling for how this works and as I said earlier we've got sales reps focused on making that initial sale, winning new business. And we've got other reps focused on getting the utilization up to where it belongs.

Jeff Frelick - Lazard Capital

Okay. And then are multi instrument sales becoming more frequent in the transactions?

Scott Garrett

Yes they are, especially when automation is involved. Automation posts chemistry through all the time and more often is pulling through immunoassay, hemostasis, hematology, etcetera.

Jeff Frelick - Lazard Capital

Can you give us a sense maybe what percent of deals are multi-instrument?

Scott Garrett

I don't have that handy.

Jeff Frelick - Lazard Capital

Okay. And then, what was the workcell placement growth in the quarter?

Charlie Slacik

I don't think we've reported that. I'm sorry, Jeff.

Jeff Frelick - Lazard Capital

Okay. I thought I heard 50%, I was just clarifying that. Did you say something about 50% related to workcells?

Scott Garrett

We said units were up 50%.

Jeff Frelick - Lazard Capital

Okay. Alright, thanks a lot.

Scott Garrett

Thank you, Jeff.

Operator

Your next question will come from the line of Peter Lawson with Thomas Weisel Partners.

Scott Garrett

Morning, Peter. Good morning, Peter.

Peter Lawson - Thomas Weisel Partners

Hi. I wanted you to quantify that SG&A increase, how much came from emerging market installations and stock comps and Dako marketing?

Charlie Slacik

We don't have the details for that handy taped here. But probably one of the ways you should look at SG&A is recognizing that we're global, a very large portion of our SG&A expense comes from outside the US, and some of that was inflated just due to currency. And second of all, a lot of headcount in places like India and China where we are expanding our sales and marketing organizations.

Then lastly it would be the Dako increase. I think I said there is about $4 million of growth just due to Dako in our SG&A growth. And lastly, the item was that stock-based item which was $4.6 million during the quarter which was non-recurring.

Peter Lawson - Thomas Weisel Partners

Okay. That's helpful, thank you.

Charlie Slacik

You're welcome.

Peter Lawson - Thomas Weisel Partners

And then the decrease in gross margins you see from selling into emerging markets. Is there any way of quantifying that either at the gross margin level or revenue level?

Scott Garrett

Charlie.

Charlie Slacik

Well, as you can see the revenue level in those two areas, in emerging markets was very high. The gross margin levels for both hardware and reagent is lower, but we don't break that out from the rest of it specifically. But it is definitely a component in what brought gross margin down. And I think as we talked about going forward, as people look at gross margin trends, as you see a growth in those markets growing at, let's say double the rate of the U.S, it will have a downward pull on the gross margin overall. There is no doubt about that, that will change, but it's not dramatic, but it is lower.

Peter Lawson - Thomas Weisel Partners

What's the kind of level of discounting you see between, say, the US and emerging countries?

Scott Garrett

It's not a question of discounting so much as a matter of the dealer margin coming into the equation. We sell our instruments in many of these markets on a cash basis to our dealers. Our dealers turn around and try to get a respectable gross margin from the end-user customer.

Peter Lawson - Thomas Weisel Partners

Okay. Thank you. And then what makes you confident Scott, that op margins are going to rebound higher to prior guidance?

Scott Garrett

I think it is just a matter of the mix normalizing during the year. We had a very high mix of instruments, and a high mix of OUS versus US sales. Those two factors, we believe will normalize throughout the year. And as Charlie pointed out, the instrument margins were actually higher in Q1 '08 than in Q1 '07. And country-by-country in local currency, our product margins have held up very well. So as the mix normalizes the operating margin will also come back to our expectations.

Peter Lawson - Thomas Weisel Partners

Then just one follow-up on that. So going forward, you are going to get these increased sales to emerging countries. Are you putting anything in place to stop that kind of spiking or dipping down of gross margins and top margins?

Charlie Slacik

I appreciate the difficulty in trying to track this, Peter. But it's going back to I think the point that John raised earlier. If you track along the growth of recurring revenue, and we really underscore that growing at that 12 to 13% range, recognizing that represents 80% of our business today, that is a fairly predictable rate of growth at this point. It's been pretty steady.

It's just the hardware, cash sales of hardware they are from time-to-time going to come in with blips that are going to pull the sales up, but also pull the margin down for those periods. I wish it was more predictable than it is. And it's not as you can see it is not as steady all the time. But we will try to do our best to pull those out so you can see what the real organic growth rate of the business is when we do pull out those cash sales.

Scott Garrett

Okay, Peter. We have to the next question please.

Peter Lawson - Thomas Weisel Partners

That's okay.

Scott Garrett

Thanks.

Operator

Your next question will come from the line of Bruce Jackson with RBC Capital Markets.

Scott Garrett

Morning, Bruce.

Bruce Jackson - RBC Capital Markets

Hi, Scott. Just a quick question on the tax rate, I know it's a little bit early to start thinking about 2009. But are you anticipating that 31% target is going to carry over into 2009?

Scott Garrett

Charlie, what do you think?

Charlie Slacik

We said 30% to 31% at the beginning of the year and that really is our organic rate. Sometimes we are going to have these discrete items due to tax settlements that will pull it down through the quarter. But if I was to model out, that as far as I can see, that would be it. We'll have some things that pull things down, but we also have an Irish strategy that in the short-term, we'll pull the rate up a little bit while we are developing the DX in project overseas. But I would not project out anything other than maybe the 30% to 31% rate.

Bruce Jackson - RBC Capital Markets

Okay. And then not to harp on the consumable growth, but you are simply not calculating that number anymore or we are supposed to focus on I think the recurring revenue, is that right?

Scott Garrett

Yes, we want you to focus on the recurring revenue. We think that it's a better indicator. Charlie?

Charlie Slacik

Yes, there are some practical reasons for it, Bruce. As we have gotten away from STLs as we've talked about in the conversation in our tax. In the past it was really important to separate the instrument revenue from the consumables because we are recognizing the revenue for the instruments up front under an STL. So we had to go through a lot of trouble, and a lot of contracts to separate those things because of revenue recognition.

But going forward with a lot of our contracts, everything is recognized over a five-year period, so going to all of that work to separate them is not as meaningful because, putting them together we think is probably the more meaningful number, plus the fact is, we are looking at cost reduction areas. We realize the number of hours and people we have, separating the three components in an OTL was taking literally hundreds and hundreds of hours. So, one of our lean initiatives is just to stop doing it especially since we think that the RR the recurring revenue number is the better measure of the base growth.

Bruce Jackson - RBC Capital Markets

Okay, that's helpful. Thank you very much.

Charlie Slacik

You're welcome.

Operator

Your next question will come from the line of David Chung with Lehman Brothers.

Scott Garrett

Good morning.

David Chung - Lehman Brothers

Thank you very much. I just had a general question in terms of items and I know our time is very limited, but. I know in the past you talked about Life Science growth for the year being roughly flat and you had good growth this quarter.

And I know you made some comments earlier about trying to be realistic in terms of growth for this year. I was just wondering if you can provide a little bit more commentary on what you think Life Sciences might be for 2008?

Scott Garrett

Yes, I think we have had a nice rebound in the first quarter. We're now expecting that rather than flat, we should be in low single-digits growth for Life Science for the full year.

David Chung - Lehman Brothers

Okay. And then is that going to be driven through again more the ex US instruments sales?

Scott Garrett

The Life Science rebound was really worldwide. We had good results in the US and outside the US, and again, I want to emphasize that this is the first quarter of real growth in some time. We expect it is going to continue but we will keep you posted as the year goes on.

David Chung - Lehman Brothers

Okay. Thank you very much.

Scott Garrett

You're welcome.

Allan Harris

Unfortunately, we are out of time. Thank you for your participation. A replay of this call can be accessed on our web site at beckmancoulter.com.

As for our upcoming investor relations activities, we'll be participating in the Morgan Stanley conference in Miami tomorrow May 1, and in mid May at the Bancs of American Healthcare Conference in Las Vegas and the Baird conference in Chicago. Please refer to our web site for more details on all of these events. And this concludes our call.

Operator

Ladies and gentlemen, this does conclude Beckman Coulter's first quarter 2008 earnings results conference call. You may now disconnect.

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