Dionex F1Q08 (Qtr End 9/30/07) Earnings Call Transcript

| About: Dionex Corporation (DNEX)
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Dionex Corp.(NASDAQ:DNEX) F1Q08 (Qtr End 9/30/07) Earnings Call October 31, 2007 4:30 PM ET

Executives

Lukas Braunschweiler - President and CEO

Craig McCollam - VP and CFO

Analysts

Jonathan Plummer - Thomas Weisel Partners

Al Kaschalk - Wedbush Morgan

Richard Eastman - Robert Baird

Vito Menza - Sandler Capital Management

Operator

Good day everyone. I would like to welcome you to the DionexCorporation Conference Call for the First Quarter of Fiscal 2008. LukasBraunschweiler, President and Chief Executive Officer, and Craig McCollam, VicePresident and Chief Financial Officer of Dionex Corporation will be discussingthe results for the first quarter. As a reminder this call is being recorded.

I would now like to turn the call over to Mr. McCollam.Please go ahead, sir.

Craig McCollam

Thank you. Good afternoon everybody. I would like to beginby reading our Safe Harbor statement. Certainstatements contained in this call that are not purely historical, such asstatements related to the company's future plans and prospects, including itssales and earnings growth estimates may be deemed to be forward-lookingstatements, which are subject to the Safe Harbor Provisions of the PrivateSecurities Litigation Reform Act of 1995.

These forward-looking statements are only predictions andmay vary materially from actual future events or results due to a variety offactors, including foreign currency fluctuations, demand in the analyticalinstrumentation market, our ability to manufacture products on an efficient andtimely basis and at a reasonable cost and in sufficient volumes, economicconditions in the areas in which the company sells its products, competition inthe analytical instrumentation market, our ability to attract and retainqualified personnel and existing product obsolescence, and other risks anduncertainties listed in the company's most recent reports on Form 10-K and Form10-Q.

The financial information contained in this conference call,should be considered in conjunction with the consolidated financial statementsand notes thereto included in the company's most recent reports on Form 10-Kand Form 10-Q, each as it may be amended from time to time.

The company's results of operations for the first quarterended September 30, 2007 are not necessarily indicative of the company'soperating results for any future period.

Any projections in this call are based on limitedinformation currently available to the company, which is subject to change.Although any such projections and the factors influencing them will likelychange. The company will not necessarily update the information, since the companywill only provide guidance at certain points during the year. Such informationspeaks as of the date of this call.

I'll now turn the call over to Lukas Braunschweiler.

Lukas Braunschweiler

Good afternoon. I would like to welcome you to ourconference call for the first quarter of fiscal year 2008 ended September 30,2007.

Let me begin by saying that we are very pleased with ouroperating results for the first quarter of fiscal 2008. We reported the highestfirst quarter sales in our history, and have continued to build good momentum.We strongly grew our operating income and increased our operating income margin.We also exceeded the high end of our guidance for sales and GAAP per earningsper share.

Sales were $82.4 million for the quarter, growing 13%compared with $72.9 million in the same period last year. Currency fluctuationsadded approximately $2.2 million, or three percentage points to reported sales,compared with the first quarter of last year.

GAAP diluted earnings per share rose $0.53 for the quarter,compared to the $0.44 reported in the first quarter last year. Net income inthe first quarter last year included cost of approximately $650,000 net of tax,or $0.03 per share, related to the company's initiative to centralize some ofits field-related technical, administrative, and support functions in NorthAmerica and Europe.

Net income in the first quarter of this year included a non-recurringtax benefit of approximately $330,000, or $0.02 per share, related to thefavorable settlement of the tax audits, offset by an amount in other expense ofapproximately $400,000 net of tax or $0.02 per share due to losses on certainforeign currency transaction.

Cash flow from operations during the quarter was strong at $13million. In the first quarter, we repurchased 257,825 shares of our commonstock for $18.6 million.

In summary, we are very happy to start a new fiscal yearwith very strong operating results. We had good growth in all of our majorgeographic regions, and in both our ion chromatography and HPLC product lines. Thegood momentum we experienced was supported by our orders growing over 20% forthe quarter.

Let me give you some more details about our performance.Sales in our environmental and life sciences markets were up significantly inthe first quarter. Petrochemical and food beverage markets were up slightly inthe quarter after several very strong quarters. Sales in our high purity water markets,that’s electronics and power were down this quarter.

Looking at sales by major geographic regions; sales in North America were up 15% for the quarter. Our NorthAmerican basis continues to gain momentum as reported for the second half offiscal year 2007 already.

In Europe; first quartersales grew 12% in reported dollars and in the mid single-digit in localcurrency. In the Asia Pacific region, we grew in the mid-teens for the firstquarter in both reported dollars and local currency. Sales growth was driven bystrong sales in China, Korea, Australiaand India.

Sales of our ion chromatography products grew in themid-teens this quarter. Our growth was driven by strong sales in our high end ICsystems and in our consumable business.

Our HPLC products grew into high single-digits this quarter.We saw strong growth in Asia Pacific and in North America, but some weakness incertain sectors of our life sciences market in Europefor a change.

In summary, again we are pleased to report these variousstrong operating results for our first quarter of fiscal 2008. I am proud ofour teams' focus and dedication on implementing our strategy.

We believe that we have continued to build good momentum,and to make good progress on our strategic initiatives. We saw solid growthacross all major geographies; North Americafurther improved, and Asia Pacific continued with its strong performance.

I will now turn the time over to Craig McCollam to discussthe financial data for the first quarter of fiscal 2008 in more detail, and tomake some comments about our outlook for a second quarter and the rest offiscal 2008.

Craig McCollam

Thank you, Lukas. Let me begin by reviewing the details ofthe income statements. Our gross profit margin for the quarter were 62.5%. Thisgross profit margin was lower than the 65.7% reported in the first quarter lastyear. The lower margin was due to a change in geographical mix.

In this case we experience relatively higher sales growth insome Asia Pacific countries, which had slightly lower gross margins than thecorporate average. Combine with that was relatively lower growth in Europe where our gross profit margin tend to be above thecorporate average. The two of those combined caused the lower gross profitmargin for the quarter.

In the first quarter, SG&A expenses were 37.8% of sales,compared with the 39% reported in the same quarter of last year. R&Dexpenses for the quarter were 8% of sales up slightly, compared with the 7.9%reported in the first quarter of last year. Overall, total operating expenseswere up 10% in the first quarter of last year in reported dollars.

The increase in operating expenses was mainly due to thefollowing factors. One, three percentage points for this increase was due tocurrency fluctuations. Two, three percentage points was due to the addition oftwo new subsidiaries; Brazil,which we opened up in October of 2006, and Taiwan,which we opened up in July of 2007, and due to targeted expense growth in China furtherbuilding our infrastructure there.

And three, three percentage points in R&D spending,mainly related to new products in our product development pipeline. And four,these were offset by the three percentage points of incremental cost ofapproximately $1 million incurred in the first quarter of last year, related tothe implementation of our centralization initiative.

Excluding all of these items, operating expenses grew aboutfour percentage points for the quarter on a comparable basis. Our GAAPoperating income increased by 16% this quarter as previously reported, thusexpanding our first quarter operating margin.

In other expenses in the first quarter this fiscal year, wereported an amount of approximately $700,000 pre-tax, due to losses on certainforeign currency transactions. Our tax rate for the first quarter was 35.3%.The reduction in our tax rate was due to the favorable settlement of a taxaudit. We anticipate that our tax rate for the rest of the fiscal year will bein the range of 36% to 37%.

In summary, as Lukas already reported, our GAAP dilutedearnings per share for the quarter was$0.53, an increase of 20%. Net income in the first quarter of last year includedapproximately $650,000 net of tax or $0.03 per share related to the company’scentralization initiative.

Net income in the first quarter this year, included a non-recurringtax benefit of approximately $330,000 related to the favorable settlement of atax audit, offset by an amount in our other expense of approximately $400,000net of tax or $0.02 per share due to losses on certain foreign currencytransaction.

Let me move to the balance sheet; Cash and cash equivalentsand short term investments were almost $70 million at the end of the firstquarter. During the first quarter, we used $18.6 million to repurchase 257,825shares of our common stock. Total shares repurchased now last fiscal year, 2007were 1,185,100 shares for a total of $69.6 million.

We generated significant cash flow from operations againthis quarter, totaling approximately $13 million. Our day sales outstanding forthe quarter was 70 days, up slightly from the 69 days at the end of the fiscalyear 2008. The increase in our day sales outstanding was due to currencyfluctuations. We anticipate that our DSO will be below 70 days at the end ofthe second quarter of fiscal 2008.

Inventory was up approximately $2 million, compared to June30, 2007. Our inventory turns for the first quarter were 3.9, up from 3.6 ayear ago and up slightly from the turns reported for the fourth quarter offiscal 2007. Inventory grew mainly due to currency fluctuations, and anincrease in inventory anticipation of higher shipments in the second quarter.

The Q1 growth in inventory excluding currency effects is inline with historical trends, and is supported by our anticipated highershipments in the second quarter. Additions to property, plant and equipment forthe first quarter were approximately $700,000. Additions were related to thegeneral operations of the company. We anticipate that capital expenditures forthe full year 2008 will be approximately a $11 million.

Let me make a few comments about our outlook for the secondquarter and the rest of fiscal year 2008. These forecast takes into accountthese following assumptions.

One, foreign currency rates will have a two to threepercentage point positive impact on our reported results, assuming the USdollar trades at it’s current level against the major foreign currencies. Two,our gross profit margin will be in the range of 65% to 66% for the full year.And three, our tax rate for the rest of the year, should be in the range of 36%to 37%.

We estimate that our sales for the second quarter will be inthe range of $88 million to $91 million. We increasing our sales estimate forthe full fiscal year 2008 to be in the range of $351 million to $359 million.We estimate that our GAAP diluted earnings per share will be in the range of $0.70to $0.72 for the second quarter.

The second quarter of last year included a discrete taxbenefit of approximately $550,000 or $0.03 per share. Therefore, our secondquarter EPS growth excluding last years' tax benefit would be in the range of8% to 11%.

For the full year 2008, we are increasing our dilutedearnings per share estimates to be in the range of $2.52 to $2.62.

I’ll now turn the call over to Lukas again who will add somecomments, and then discuss his view on the outlook for the company.

Lukas Braunschweiler

Thank you, Craig. Each quarter I have provided you with abrief update on our key strategic initiatives. Let me given you another update.First, our Asia Pacific region in continues to show good growth. Oursubsidiaries in China, Korea, Australia,and Indiathat were established during the last five years represented the fastestgrowing countries this quarter, and has become a strong base of growth in ourAsia Pacific region.

The Asia Pacific region continues to grow faster than ourcorporate average, and now contributes over 30% of our global sales. Two, weexecuted against our initiative to expand our sales service and marketinginfrastructure as we opened direct operations in Taiwan this quarter.

Three, we continue to focus on reducing our DSO onincreasing our inventory turns. We made solid progress this quarter again,despite the adverse effects of currencies on DSO and on [IPO].

And four, we continue to implement our global IT strategy tostrengthen our global infrastructure and to further enhance the efficiency andreliability of our business, accounting, and reporting processes. We will assumemore capital expenditures related to this initiative through out the year.

Looking ahead, I believe that we are well positioned tocontinue our success in fiscal 2008. We should continue to benefit from ourexisting strong product portfolio and the new product launched in the lastfiscal year.

We will execute against our key initiatives and objectives tostrengthens our markets and product offering. We will of course on achievinggood solid sales growth, managing our expense, and improving profitability. Allof these actions are designed to ensure that we invest in our future. Also, wewill continue to have a strong emphasis of generating high cash flows and a highreturn on invested capital.

I would now like to open the call up for questions.

Question-and-AnswerSession

Operator

(Operator Instructions). We will go first to JonathanPlummer with Thomas Weisel Partners.

Jonathan Plummer -Thomas Weisel Partners

Hi Lucas, hi Craig.

Craig McCollam

Hi Jonathan.

Jonathan Plummer -Thomas Weisel Partners

Hi. Lucas I was wondering if you could start off by just maybe giving us a little more color on what happened in North America in the quarter? Was it stronger IC or HPLC that reallydrove that mid-teens growth?

Lukas Braunschweiler

Well, fortunately, we can say both business linescontributed nicely. We had a great comeback in HPLC. We commented several timesthat, with the transition to the new product line more than a year ago in North America it took us someone longer to really adoptit, and we have obviously greatly overcome that, and they had a particularlystrong performance in HPLC, but also IC was doing very, very well. So it’sbroad-based.

Jonathan Plummer -Thomas Weisel Partners

And then from a end market perspective, was that mostly lifescience?

Lukas Braunschweiler

In North America it'spretty much along the corporate average.

Jonathan Plummer - Thomas Weisel Partners

Okay.

Lukas Braunschweiler

As we said that “life science” and “environmental” are thetwo key markets. They are up nicely corporate wise as well as in North America. And then of course North America has quite a nice share for us in chem/petrochem, and thatmarket is still performing solid.

Jonathan Plummer -Thomas Weisel Partners

How would you describe the strength of North America in terms of your visibility going forward? Do you feelcomfortable that this level of growth is or may be slightly below this level issustainable?

Lukas Braunschweiler

Well, definitely, when we look back, we have a look back alsoa little bit; two years, and I say, we had a tremendous growth in this quarter.We have to be a little bit fair that last year we had probably really not sucha strong quarter in North America, so we haveimmediate comparison.

But even if you take the compounded general growth over twoyears, it's a pretty solid number. So from that end I will conclude and alsofrom the bookings dynamics momentum, the order flow, that at least what we seefor a moment we should been in a good position to home a series of goodquarters in North America.

I sense that you referred to the general economic worrieshere. So far in our end market we haven't seen that. And when I read thismorning that obviously the third quarter, calendar third quarter sales in the US economy were3.9%, it conference that I am not so worried about the ends markets. For us allare more worried that pharma might not get off the ground.

But I think in general pharma, biotech is coming back herein the U.S or at least big pharma, biotech has continued to be on a high level,and I think we are going to hopefully see, good response from this customers aswe go forward.

Jonathan Plummer -Thomas Weisel Partners

That's very helpful, thank you. In term of the order growth:you said it was over 20% in the quarter, how long did it take you work thatoff?

Lukas Braunschweiler

Yeah, usually we don't break quarters in order, but I wantto make a statement to confirm that the momentum obviously is here. We work offwith a backlog of about 1.5 to 2 months, so that gives you about the feeling

Jonathan Plummer -Thomas Weisel Partners

Great. And then lastly, what was the consumable growth inthe quarter?

Lukas Braunschweiler

The consumable growth in the quarter, Craig.

Craig McCollam

Was in a low double-digit.

Jonathan Plummer -Thomas Weisel Partners

Great. Thank you very much for taking my questions guys,great quarter.

Operator

We'll go next to Al Kaschalk with Wedbush Morgan.

Al Kaschalk - WedbushMorgan

Good afternoon guys.

Lukas Braunschweiler

Hi Al.

Craig McCollam

Hi Al.

Al Kaschalk - Wedbush Morgan

Strong execution. The only question I have on that is on thegross margins, and Craig may be you can reiterate or restate what you said Ithink I missed. Why was it may be below your expectations?

Craig McCollam

Sure, no problem. You know there are certain countries,especially in Asia Pacific, where we achieve slightly lower gross margins, butwe also have slightly lower operating expenses; examples will be China, India; would be two examples ofthose. And those two countries performed extremely well this quarter. And sothat tended to bring down our gross margins a little bit, but our overalloperating margin didn’t suffer.

When you look at the other side, Europedidn’t grow quiet as quickly as it had being growing over the last severalquarters, which have been benefiting us from a margin standpoint. And itgrowing a slower on the mid single-digit on a local currency basis definitelydidn’t help us in this first quarter.

And especially it's a couple of countries where we generallyhave higher margins than our corporate average, didn’t grow significantly thisquarter. And so it was really just that mix. So, overall, I don’t think itreally effected our operating income margin significantly, but it caused ashift between the gross margin from one quarter to the next.

Lukas Braunschweiler

I think it’s my second year, the margin is of course acomplex aggregate of a lot of factors when it comes to mix. We have the productmix, we’ve the country mix, the geography mix that’s definitely playing inhere.

And yeah, I mean we like to grow everywhere that's sure, butwhen you have relative changes, as Craig explained from Europeout to certain Asian and not all Asian countries I think in that case, it mightrelatively impact your GP not your OP, and that happen that quarter.

So we are not worried that it is a trend. I mean we haveseen our margins increasing, increasing, and then again usually Q1 being alittle bit lower and then sequentially coming back up. So we expect that willhappen also.

Al Kaschalk - WedbushMorgan

Okay. Thanks for clearing it out. On the ASP side are youseeing any opportunities to drive up price or given what seems like a verystrong volume.

Lukas Braunschweiler

Yeah. In fact when we really analyzed, that quarter was verynice in terms of the product line growth and in dollars it was very much inline with the unit shift. So that indicates and shows that our prices wereholding up quite nicely. We discussed that last week's executive board, and wehave certain product lines where specifically we want to look into priceinitiatives.

Al Kaschalk - WedbushMorgan

Would you say that it was better than your expectations orjust confirming perhaps may be what you were hoping?

Lukas Braunschweiler

Yeah. I think it's nice to see, but, though I always say: inour market the price heights are not so dramatic as in other markets [of thisworld]. We always have to careful that, finally, we don’t have a price erosionovertime. So, we are happy to see that with the initiative we regularly puttingprice regarding a cost reduction or on the top line regarding increases ofcertain prices. But obviously, it works and that’s Q1 was good proof of that.

Al Kaschalk - WedbushMorgan

And I have a couple of balance sheet questions. Notespayable 18 million and then deferred tax is 26.5 relative to the year-endnumbers. Could you just comment on, I suspect I understand what notes payableand all, but a change in deferred tax? It seems a bit up?

Craig McCollam

Sure. I mean the notes payable as you wouldn’t suspect, webuild up cash internationally and just borrowed domestically, but net cashdidn’t change dramatically for the corporation. The deferred tax liabilitiesand there is also an offset in the deferred tax asset, that relates to ourimplementation of FAS-48 which is a new income tax accounting standard, thatfor us went into effect on July 1, and they are rather than netting yourexposure which was allowed previously under the FAS-5 guidance to talktechnically. You could net your exposures, now you have to show them growtheven though you don’t anticipate that they will have a significant netexposure.

So it's just really a grossing up of the balance sheet dueto our friends around the East Coast, who are setting the standards for theaccounting practices. So it really doesn’t change anything rather than, like Isaid just, grosses up the balance sheet. Overall our net difference wasn’tsignificant

Al Kaschalk - WedbushMorgan

And finally it seems like the business is really is veryhealthy, strong performance operationally, and the guidance you have left sortof in check but kept the share repurchase program at a pretty good averageprice for the quarter. What are you assuming for share count may be goingforward, or how do think above cash build as we build as you move out in thefiscal year?

Lukas Braunschweiler

I think that the answer was what we said last time. You areprobably less looking at the number of shares than about the total dollaramount we mostly likely going to spend. And you can assume that we are going tospend about the same amount as we spend last quarter. So it’s in the order ofthe free cash flow.

Al Kaschalk - WedbushMorgan

I'll go back. Thank you

Lukas Braunschweiler

But it depends of course on the price and the accretionpoint how many of the share you are going to buy there.

Al Kaschalk - WedbushMorgan

Ok. Thank you

Lukas Braunschweiler

I mean Mr. Bernanke's decision today was helpful.

Operator

(Operator Instructions). For the next to Richard Eastmanwith Robert Baird.

Richard Eastman -Robert Baird.

Yes, good afternoon, Lukas

Lukas Braunschweiler

Hi, Rich.

Richard Eastman -Robert Baird

Hi, Craig. Lukas, could you just talk to for just a secondfrom our product line stand point, HPLC growth was up high single-digit. Isthat number that would have met the plan. I would think that the HPLC productline has to may be grow or little faster this year, given its performance last year.And I‘m just curious, is that a number you are pleased with or should we bethinking a little faster growth rate for HPLC?

Lukas Braunschweiler

I mean you got it right. The annual plan is pretty much inline with the

five year plan which we usually comment on the investorpresentation, which says yeah we are going to plan for somewhat highsingle-digit corporate with a little bit lower IC, and in the teams meetings tolow teens the HPLC, and that's all our plan for this year. Shipment wise westarted a little bit below that, with HPLC compensating with IC, but bookingswise I can make yet another comment, HPLC grew faster. So the momentum is here.We're going catch up I am convinced.

Richard Eastman -Robert Baird

Okay. And to date when you talk a little life science growthin North America, is that product line, I think you mentioned HPLC growthslowed down in Europe. I think you had a bigyear last year in HPLC in Europe, but is that…

Lukas Braunschweiler

A very good point. We have to dissect a little bit. In factHPLC growth in Europe was pretty strong whenyou back out the software. Software we had a good result, but we had tremendousresult last year. System wise or unit wise we had a nice growth in Europe in HPLC. So the underlying business is there, butthe topic usually offered is larger system or software orders and last year wehad a couple of very big months already in Q1, and the largest one is as achallenge in Q2 in fact.

Richard Eastman -Robert Baird

So that’s, so the Chromeleon product, you put those salesinto the HPLC?

Lukas Braunschweiler

No, we put it where they belong to, but these larger ordersusually are mostly HPLC, it is what we call multiple time based order forlarger pharma companies. They are very often 80%, 90% instruments related toHPLC.

Richard Eastman -Robert Baird

Okay. And then Lucas how do you look at or think about againthe continued cost cuttings is going in large pharma, and I think was itNovartis recently. But it’s a little bit inconsistent with the industry's viewof pharma coming back and pharma strengthening. We just have not seen to seethe end of the cost reductions in large pharma?

Lukas Braunschweiler

Well, I think you pointed to, of course, the more difficultpart to the newly sized pockets in life sciences as we comment on it. I thinklarge pharma had probably the most difficult things two and three years ago,and hopefully it’s largely over that.

But still ahead of them are still some pipeline issuesregarding patent expiration, notably of course Pfizer having still Lipitorahead of stem cells and whatsoever. So I think they do a lot of that inanticipation of streamlining their operations to cope with some of theseexpirations.

Now they are usually in pocket II what we called specializedpharma which is Novartis, Roche, Sanofi etcetera. I think that when you read,especially from these perspectives, about Novartis and Roche, it’s a strikingdifference. Roche is in a good shape with a tremendously strong pipeline Iwould say. And then also buoyed by Genentech of course, which I consolidatedunder Roche.

Where as Novartis is, and they say it, they have had a badyear, but it’s nearly old pipeline. Nearly every months they have a pipelineuse which is not favorable to them, so something dying in clinical 203. Andthey think they are over in a year and through those pipeline where is.

The nice thing though, and that brings me to another point:When you look at Novartis their standard business which is generic hums and wefeel that. We get a lot of good orders and good response and projects from thegeneric side on Sandoz. So from that and I am not worried that mid term alsoNovartis will come back to good performance.

Richard Eastman -Robert Baird

Okay.

Lukas Braunschweiler

The cost cutting by the way as I understood is mainly in theUSand in prescription drug, pharma, [or MT].

Richard Eastman -Robert Baird

Okay. Alright. And then just one additional question. Thisis a kind of nit picky, but the gross margin guidance maybe it slipped down apoint. Is that just from where it was at the beginning of the year? And I amjust curious is that a function of kind of you looking out and maybe thinkingAsia is going to be the stronger growth region.

Lukas Braunschweiler

Yeah. It’s always that. It's a very difficult thing to find.The two of them had some of these questions three months ago, I remember. Youcalled me heroic while I persisted to say we’re going to hit 66%, and then wecame out of a Q4 which had very high margin we had at the end 66 somethingmargin for the FY ['06] say in total year. And the currency environmentcouldn’t quite look favorable. And we are not substantially taking a differentview but as I said putting the tax to standard one up to 65, 67 feel some whatbetter.

Richard Eastman -Robert Baird

Okay.

Lukas Braunschweiler

So, it’s not a conscious back paddling or so.

Richard Eastman -Robert Baird

Okay. I’m with you. Alright. I think that is it. Thank you.

Lukas Braunschweiler

Thank you

Craig McCollam

Thanks, Rick.

Operator

(Operator Instructions). We will turn to Vito Menza withSandler Capital Management.

Vito Menza - SandlerCapital Management

Hey guys another terrific quarter.

Lukas Braunschweiler

Sure

Craig McCollam

Sure.

Vito Menza - SandlerCapital Management

Couple of questions for you. First one consumables versusequipment sales, could you break that up for the quarter?

Lukas Braunschweiler

Craig.

Craig McCollam

Sure our consumable sales were a little bit lower, they wereabout 11% growth for the quarter, whereas system sales were a little bit higherthan the average for the quarter.

Lukas Braunschweiler

What we like, because system sales built long-termconsumables business.

Vito Menza - Sandler Capital Management.

Exactly. And just what’s that breakdown in percent ofrevenue wise.

Lukas Braunschweiler

Consumables are about 20% of revenue.

Vito Menza - Sandler Capital Management.

Okay. All right and then on the charge that you took lastyear in the first quarter of 650,000, just remind me where that fell in theP&L. Was it included in gross margin or SG&A, where did it fall?

Lukas Braunschweiler

That was inSG&A.

Vito Menza - Sandler Capital Management.

Okay. And last one, depreciation expectations for the yearare, I guess depreciation and amortization expectations are about $8.5 million?

Craig McCollam

Yeah. that's exactly right.

Vito Menza - Sandler Capital Management.

Okay. And CapEx you said is running $11 million?

Craig McCollam

Not $11 million is what we anticipate for the quarter. Forthe year we spent obviously about $700,000 for the quarter but we have a coupleof projects that will we have plans for Q3 and Q4 that will see that increase.

Vito Menza - Sandler Capital Management.

Okay. So its primarily then growth CapEx for some of thesenew projects.

Craig McCollam

It's that as well as we have to do some renovation on one ofour facilities and in our Sunnyvalecampus. So that will also add to it.

Vito Menza - SandlerCapital Management.

Great guys. Well congratulation again on a great quarter.

Craig McCollam

Thank you.

Vito Menza - SandlerCapital Management.

Take care.

Operator

There are no further questions. I would like to thank everyone for participating in the Dionex First Quarter Conferences Call.

Lukas Braunschweiler

Thank, Thank you everyone. Have a good Halloween. Talk toyou later.

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