Waters Corp (WAT) 2004 Q2 法說會逐字稿

Good morning. Welcome to the Waters Corporation second quarter financial results conference call. All participants will be able to listen only until the question and answer session of the conference. This conference is being recorded. If anyone has any objections, please disconnect at this time. I would like to introduce your host for today's call, Mr. Douglas Berthiaume, chairman, president and chief executive officer of Waters Corporation. Sir, you may begin.

Thank you. Well, good morning. Welcome to the Waters Corporation second quarter financial results conference call. With me on today's call is John Ornell, Waters chief financial officer. As is our normal practice, I will provide an overview of the second quarter results. John will take you through the financial details and then layout our full year 2004 financial outlook and finally, we'll open it up for Q&A. Before I begin, I'd like John to cover the cautionary language. John?

During the course this conference call, we may make various forward-looking statements regarding future events or future financial performance of the company. In particular, we will provide guidance regarding possible future income statement results of the company, this time for Q3 and full year 2004. We caution you that all such statements are only predictions and that actual events or results may differ materially. For a detailed discussion of some of the risks and contingencies that could cause actual performance to differ significantly from our present expectations, see our 10-K annual report for the fiscal year ended December 31, 2003 in part one under the caption business risk factors. We further caution you that the company does not obligate or commit itself by providing this guidance to update predictions. We do not plan to update predictions regarding possible future income statement results except during our regularly scheduled quarterly earnings release conference calls and webcasts. The next earnings release call and webcast is currently planned for October 2004.

Thank you, John. Well, the positive momentum that we experienced in the first quarter with improved pharmaceutical and industrial demand continued to benefit our second quarter results. Orders for our new Acquity UPLC system have met your expectations and new mass spec introductions at June's ASMS conference were well received. Organic sales growth for the quarter came in at 9%, slightly improved over the first quarter. But this growth is a little more impressive when you consider that it was achieved without significant revenue from acuity shipments.

From a product line perspective and on a constant currency basis, HPLC continued to perform well in most geographic markets. Although HPLC sales revenue only grew 5%, we built more than $5 million in backlog associated directly with our new acquity UPLC launch. Our thermal analysis product sales grew 9% and mass spectrometry grew at 11%. We did change our approach to the acquity introduction during the second quarter. We decided to postpone the lion's share of customer shipments of acquity UPLC systems to the third quarter, primarily to allow for an extended evaluation of the multiple system configurations that are possible when you combine acquity with the full range of Waters mass spectrometry systems. In addition, we have implemented refinements to our final QC test protocols for the stand alone UPLC instrument and its associated columns and accessories. That was done to support anticipated high volume production.

The majority of the systems that we built in the second quarter were shipped to our worldwide demonstration labs to address the strong demand that we're seeing for running customer samples. However, there were a handful of instruments that were delivered to customers who required second quarter installation. Let me assure you that demand for acquity is strong and customers are clearly aware that performance benefits of this new technology. As expected, the majority of customers expressing interest in acquity are working within research labs at pharmaceutical accounts. A significant percentage of our customers have already ordered and others are evaluating purchasing Acquity along with the Waters research grade mass spectrometer. Look at the geographical HPLC picture, sales growth in the second quarter was driven by continued strong demand from pharma customers in the United States and Asia . In these regions, growth continued on the double digit trajectory established in the first quarter. HPLC sales in western Europe, however, were soft compared to the prior year. The European performance was primarily the result of the slower overall pharma capital spending. Coming into the second half of 2004, we feel that pharma demand trends in Europe have stabilized and that we have the opportunity to grow based on our new product introductions.

Within mass spectrometry, our tandem quadrapol system, the Quatro Premier and the Quatro Micro, continue to perform well with strong double digit growth rates. The performance of the Quatro Premier is allowing to us to recapture some market share in demanding applications, while the Quatro Micro is servicing new business opportunities in industrial and environmental testing labs . Discovery oriented mass spec systems have mixed sales results fot the quarter, with the Q-Tof continuing to decline while the new LCT Premier performed well in both proteomics and small molecular weight research labs. We expect Q-Tof sales to pick up later in the year as we have the opportunity to demonstrate the newly launched Q-Tof Premier to more researchers and begin shipments in the fourth quarter. Initial customer response to the Q-Tof premier and the expression analysis system that combines the Premier with the nano Acquity UPLC has been very positive. We feel that the protein expression system is a comprehensive approach to addressing the analytical challenges faced by researchers in proteomic and biomarket discovery applications. On the last call, I mentioned our strategic initiative to aggressively enter into the lab informatics market. As you recall, we acquired new genesis in the first quarter of this year. During the second quarter we made significant progress in integrating new genesis employees into our field and marketing organizations and in nationalizing our informatics products portfolio. In the third quarter we will begin shipping our E laboratory notebook product and expect that informatics products will accelerate revenue growth in the second half of the year. Our TA instruments business had another strong quarter with organic sales growth of about 9%. We see demand for thermal and rheology instruments continuing strong in the outlook for the second half of the year is a continuation of this positive trend.

In summary and before turning the discussion over to John, we feel that we are in excellent position to deliver a successful second half performance. So far this year, we have enjoyed the effects of overall improvements in most of our end markets and have grown sales without the benefit of our significant new product initiatives. Feedback that we are receiving from our field organizations and directly from our customers generally points toward continued favorable business conditions. Furthermore, we expect that our new products initiatives, including Acquity UPLC, Q-Tof Premier and the E lab notebook will favorably impact second half growth. At this point, I'd like to turn it over to John.

Thank you, Doug. Good morning. Financial results for the second quarter met our expectations with proforma earnings per diluted share of 40 cents for the quarter versus 33 cents in the second quarter of 2003. On a GAAP basis, including a litigation settlement, earnings per share were 49 cents versus 33 cents in the second quarter of 2003. The positive momentum we saw in our business over the last couple of quarters continued into the second quarter with sales growing 12% on a reported basis. This growth included a favorable foreign exchange benefit of 3 percentage points this quarter. Sales of HPLC products grew slower than expected at 5% in constant currency terms. As Doug pointed out, shipments of our Acquity systems were pushed into the third quarter and resulted in a backlog build of approximately $5 million that lowered our Q2 HPLC sales growth by 3%. Our mass spectrometry products shipments grew at 11% this quarter, our tandem quadripole instruments continued to drive growth in this product segment and we are encouraged by the continued strong demand in this marketplace. While the Q- Tof business remains weak, we have seen a pickup in sales of our LTC premier product that has helped to mitigate this impact. Our thermoanaylsis business continues this positive performance with growth of 9% this quarter precurrency impact. The addition of informatics businesses increased sales by $5.4 million this quarter, supplying approximately two points of sales growth.

Gross margins, improvements came in slightly better than expected and were up 40 basis points over Q2 last year. We continued to deliver manufacturing cost savings on existing products and enjoy favorable benefit from foreign exchange. Additionally, our mass spectrometry margins improved in Asia this quarter as a result of direct operations in that region. SG&A expenses increased this quarter over Q2 last year, principally as a result of foreign currency translation, the addition of the new genesis business expenses and the ramp up of direct field and sales service personnel in Asia. This quarter we received a litigation settlement associated with our previously disclosed case relating to thermal analysis technology. Receipt of this payment fully settled this case and there should be no further financial impact. Our effective tax rate excluding the tax impact of the $17.1 million litigation settlement was 22% this quarter. We concluded our 2003 board approved $400 million buy back program this quarter as we purchased 2.1 million for $94.4 million. Going forward, we will continue to evaluate additional buy backs as part of our efforts to maximize returns to shareholders. At quarter end, outstanding debt totalled $409 million, primarily related to borrowings in the United States used to fund the stock repurchase and recent acquisitions.

Cash and short-term investments totalled 420 million, as compared to 409 million at the end of the first quarter. We are comfortable with the current debt levels on our balance sheet and we are generally comfortable with the moderate amount of leverage going forward. Overall, the company remains in a net cash position and net interest income position. As many of you know, there is pending legislation that could provide for repatriation of unremitted earnings of foreign subsidiaries. We are evaluating this legislation and its impact on our capital structure and future buy back activities. We continue to maintain a strong balance sheet with cash from operations of $72.5 million on a GAAP basis this quarter. Removing the litigation settlement of 17.1 million, our adjusted cash flow, cash from operations is $55.4 million. Capital expenditures for the quarter were 27.1 million, including $18 million for an opportunistic building acquisition adjacent to our Massachusetts headquarters. Excluding litigation settlement and the building purchase, the business generated about $46 million of cash for the quarter. Cash flow for the first half was very strong, with cash from operations of about $128 million, capital expenditures of $36 million, yielding net cash generated of 92 million, or approximately 110 million if you exclude the building purchase. For the full year, we believe the business will still generate $200 million of cash from operations, less capital expenditures in spite of the unplanned building acquisition. Clearly, our cash flow continues to improve as we expect to meet our original cash flow objectives after funding the new building purchase.

Just a quick note on the building acquisition, while we had not planned to acquire additional space until sometime in 2005, we were able to secure about 250,000 square feet of space adjacent to our current facility at a cost that is 40% below replacement value. This will allow us to relocate our informatics business later this year with no increase in facilities operating costs. Accounts receivable day sales outstanding stood at 78 days this is quarter, down from 79 days in Q1 this year and unchanged from Q2 last year. On a constant currency basis, DSO improved by one day versus prior year. Inventories are up over year end balances, principally as a result of the Acquity inventory build and we do not expect further inventory build for the remainder of the year. We are pleased with our first half financial performance and believe that our business prospects over the remainder of the year will improve as we ramp up shipments of our Acquity systems, our quatro premier and begin shipment of our Q-Tof premiere in the fourth quarter. These new products, coupled with a healthy overall economic environment we believe, will allow us to grow product line sales on a currency neutral basis as follows:. HPLC products are expected to grow 10-11% for the full year; mass spectrometry is expected to grow around 10%; and thermal analysis products at 8-9% for the full year. Foreign currency continues to benefit our business and at today's exchange rates should add 3-4% to full year growth. Additionally we expect the newly acquired informatics business to add 2-3% of growth to full year sales. At this mid teens growth in revenue, we expect earnings per diluted share of $1.78 for the full year within a normal tolerance of 2-4 cents and before unusual charges. Turning to the third quarter, we believe sales precurrency will grow around 12-13% with currency adding approximately 3-4% to this growth. At this sales level, earnings per diluted share, are projected to be 42 cents with the normal 1-2 cents tolerance for the quarter. Back to you, Doug?

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

Thank you. That the time, we are ready to begin the question and answer session. If you would like to ask a question, please press star-one. You will be announced prior to asking your question. To withdraw your question, press star-two. Once again, if you have a question, please press star-one. One moment, please. Our first question is from Sara Michelmore SG Cowen, your line is open.

Doug, just to follow up on your question, I mean your comment about-- what, what was the change there and--

Sorry, Sara, you're--

Tempered outlook--

Your lost--

Has you business grown and what are your expectations for the second half?

Could you repeat the question, Sara.

Yes. Sorry. I'm remote. I heard your commentary about HPLC growth in Europe. Just wondering what really was the issues there, was it broad-based weakness, was there a particular customer, did the business decline in the quarter? And what was the outlook that you guys are now expecting for H 2, when you say it's tempered or you should have said it was stabilized, what exactly does --

Yeah, let me provide this color, Sarah. The general weakness in Europe, and now I'm talking western Europe here, traditional western Europe, was pretty broad based throughout the large, you know, countries of Europe. We actually saw pretty good strength in southern Europe, in Spain and in Italy, but we did see pretty consistent slow conditions in the UK, Germany, France, and Holland. Now, the one piece of color is that we were working a lot of big orders that didn't come in in the quarter. Now, you and I both know that we hear that every quarter, particularly when results are a little bit soft. This seems to have more credibility as we have booked a number of those orders as we have moved into the third quarter and we are seeing a pretty sharp pickup early on in the quarter in Europe. So I think there is some credibility there. I, I think we are seeing a noticeable dynamic that European pharma companies, or global pharma companies, are favoring U.S. R&D investments over European investments. You know, we have hypothesized about that and our European management is quite clear that they are told that that's going on. That may be, may be a more definable piece of what we saw in the third quarter, but it was pretty broad based.

On the other hand, the amount of business that they are working is strong as it's ever been. The response to Acquity is just as strong in Europe as it is elsewhere in the United States and the customer and the-- our field group is pretty optimistic about the second half. So, you know, we saw a decent result in the first quarter. We saw soft results in the second quarter. Early on in the third quarter we're seeing a pickup. It's early, but-- and our field and our customer base in Europe is talking more optimistically about the second half.

Okay. Thanks. And just a follow-up on the Acquity launch. Can you talk about what do you guys think of in terms of the length of sales cycle there and how long it takes a customer to look at the technology and get interested in a sale, how do you think about terms and if you could contrast-- current product line.

Let's say past the initial introduction, I don't think the sales cycle is going to be any different from normal, you know, traditional HPLC. The one difference, I would say that we're seeing is that there is a great deal of interest with Acquity in mass spec applications. Of course those are very high value systems and sometimes they are a little bit more demanding demonstrations in those applications.

Okay.

Than a traditional demonstration. But I think at this stage the only thing that's different is that it's brand new technology. It's dramatically improved performance and so customers still don't believe it to some extent. They really want to see it and all I can say is that those demonstrations are proving very eye opening and so that's, again, a piece of the optimism that you hear from us, is that customers are responding very, very well, but a number of them are-- want to see it in their own labs or with their own compound.

Gotcha. That's so helpful, Doug. Thank you.

Your welcome.

Daniel Erinson with Pilot, you may ask your question.

Hi, guys. You mentioned that most the end markets are improving. Which end markets are not improving?

Well, we would say that pharma is definitely strong in Asia in the U.S. and we saw it relatively weak in Europe. While we see it better in the second half, I don't think we're going to see it booming in Europe. Our government business is so-so. I would say it's not where-- our traditional industrial businesses had a good quarter. I would say within the broad range of industrial environmental applications were quite strong and we continued to see good, good results in things like Nutraceutical applications.

Okay. I'm new to you guys. You mentioned Q-Tof. Could you quickly in a second tell me when a Q-Tof is.

Sure. Q-Tof is an orthogonal mass spectrometer.

Okay.

Which means it provides MSMS capabilities. It's particularly useful in proteomic applications.

Okay.

If you're new to us, you wouldn't maybe know that a couple of years ago we were involved in patent litigation that required us to redesign our Q-Tof instruments and we're just coming to the market this year with a replacement to our previous generation of Q- Tof and that's why we talk a little bit more about our most recent introduction and this expression, expression is a trademark for a system used in proteomics and biomarket discovery applications.

Okay. I appreciate it. Thank you, guys.

You're welcome.

Darryl Tardy with Merrill Lynch. You may ask your question. Good morning, guys.

Good morning, Darryl.

Can you give us a break down of growth in HPLT between instruments and chemistry and services.

For second quarter, we are looking at-- as I said, 5% overall.

Mm-hmm.

Service and chemistry would be continuing at the double-digit pace. For this quarter with the, the-- not shipping Acquity, the instruments would be relatively flat.

Okay. Great. And then does your guidance for the third quarter with respect to Acquity, do you expect to make up the shipments that you weren't able to ship or that you decided not to ship in the second quarter?

Yes.

or is fulfillment of the order sort of pushed off--

--whole complement of the backlog that we generated in the second quarter.

You do, okay. Okay. Great. Thanks.

Sure.

Larry Neibor with Baird, you may ask your question.

Thank you. Good morning.

Good morning, Larry.

You were refining your Q2 test protocols. Does that imply that our calibration issues because of the higher pressure, it's more difficult to keep the Acquity in spec?

No. Let me embroider a little bit on Acquity, Larry. You know, our QC-- frankly, we debated long and hard whether we should ship Acquity for customer revenue in the second quarter. It was actually a very close call. The instrument and all of its capability, you could well argue was in even better shape than similar instruments in previous life times where we ship for customer revenue. At this stage of a new product life cycle, however, you're almost assuredly going to have some issues that start out with these instruments and, you know, we have existing protocols and we try to eliminate those. What we decided in this case in particular, because there's so much interest with a wide assortment of mass spectrometry instruments coupled to Acquity that-- and the potential for software conflicts was perhaps greater as a result of that, that we wanted to go the extra yard and doing the final burns of software, the final QC protocols to minimize the-- any startup problems that our customers would have when we first shipped this product. So I would say what really changed was we took another look at what our release criteria were and said we're going to screw down on those even harder to make sure that that customer experience out of the box was going to be a very good one and the cost of that was a month and a half delay in volume customer shipments. The manufacturing processes, I would say are an added component of making sure that this quality moves you out of the box, quality experience, even better in our customers eyes. So it's that context.

Okay. I think you mentioned you had five million in orders by the end of the quarter for Acquity. That doesn't seem like a very large back log given the size of your business or do you think that's, that really is a large backlog?

Well, it's a significant backlog for one instrument, and for an instrument that we had anticipated that we were going to be shipping. We actually built more backlog than that during the quarter. So-- there was $1 million, over $1 million of backlog for mass specs attached to the Acquity that isn't included in that five million as well.

So I, I mean-- I agree with you. In and of itself, it's not a huge number. It's just an-- we had originally anticipated having, shipping and recording revenue that included Acquity in the quarter and it didn't. So that's really the scope of the Acquity that orders were taken for but that we didn't ship.

Okay. And one final question. What is the growth in your mass spec business for the first half of the year?

Well, the first quarter was-- Down. -- soft quarter and the second quarter was an up quarter.

Slightly down between the two, but we're expecting low to mid teens growth for the second half of the year bringing the overall growth to around 10%.

So on a normal basis, most of your business is back end loaded in second half of the year in the mass spec?

No. I think the real dynamic is that the first quarter of '03 had a backlog reduction in it and it was a strong quarter. So the comparison against the first quarter this year was unusually tough, plus we saw --we have been seeing a gradual improvement in our mass spec business over the last two or three quarters. So you had that dynamic that caused an unfavorable comparison in the first quarter with anniversaried all of that by the time you get to the second quarter and so I'd say we think of the double-digit growth in the second quarter as now a normal situation and we have normal quarters of comparison in the second half.

Okay. Thank you.

Steve Unger with Bear Stearns, your line is open.

Hi, good morning. Just first question on HPLC, could you comment specifically on sales, how they went in the quarter in the QA/QC area at big pharma?

I don't-- we don't have an application split on QA/QC at this basis. I can say that we-- I guess from the details that we do have of sales, we don't see any dramatic shift in application focus. We have been strong in QA/QC for the last 6 or 12 months. The business in the U.S. was pretty broad based across research applications and QA/QC. And the business in Europe, I would say, the weakness was more focused on research and our business in QA/QC was probably stronger than research in Europe.

Okay, and then how was the Acquity launch going in that market, in the QA/QC market?

I'd say in order of interest, it's the second order of interest, but it's still pretty strong. I think what's-- what I continue to see from, from the customers who, who we're, we are dealing with a whole group, I just got a little tongue tied here, but this whole year we've been bringing through large, large groups of both international and domestic groups of customers for technology seminars and so we've been exposing the details on Acquity to them for about the last six months. The interest on the part of QA/QC is they can get pretty extraordinary productivity out of the Acquity because of the speed. You can do with one Acquity what it sometimes takes two other traditional HPLC's to do. So you can replace a number of HPLC's with fewer Acquities down the road. Having said that, I'd still say that the primary interest is in research applications.

So the bulk of the orders at this point in research applications?

Yes.

Okay, and then what is your-- what was your revenue expectation for Acquity in the second quarters and what is your revenue expectation for Acquity in the full year for 2004?

Okay. We're not going to talk about units. I think in general you can say we had anticipated shipping about $4-5 million of Acquity-related revenue in the quarter, and, John, do you want to handle the second half?

Yeah, and I would say as you look at the third quarter without going into units, we're looking to ship that backlog and perhaps that amount again, so maybe closer to $8-10 million and then the ramp up in the fourth quarter is to go perhaps up to maybe 12-14 million.

Awesome. That's great. That's very helpful. Then one last question on mass spectrometry. Could you comment on sequential growth for the first quarter there, either a specific number or directionally?

Well, yeah, the first quarter was minus 19.

I'm talking about sequential--

You're asking versus just quarter over quarter sequentially?

Sequentially from the first quarter to the second quarter.

Yeah, okay. Just a sec. It was-- versus the first quarter, it was flat.

Flat, okay. Great. Thank you.

Yep.

Bob Aye with Bennett Lawrence, your line is open.

Hi, John. You went rather quick when you gave out guidance and you-- I think I got your-for the year you have $1.78?

That's correct.

And what about for third quarter?

For the third quarter it's 42 cents.

Okay. The backlog you're talking about $5 million of HPLC and plus $1 million of mass spec, would, all that happen in third quarter? I mean--

Yes, we are anticipating that we'll be able to ship both of those elements of backlog in the third quarter.

Okay, and also talking about foreign earnings repatriation. How much are we talking about? If you do decide to?

Yeah, Waters has probably around 600 million, perhaps a little more of unremitted earnings overseas. Exactly how much could be brought back vis-a-vis, you know, foreign requirements for maintaining a solvent subsidiary are yet to be determined, but, you know, we're talking certainly something perhaps in the $4-500 million range is our current estimate, but this is all obviously pending at this stage, but it's obviously a significant amount.

Okay. Thanks a lot.

Okay.

Just to add a little bit to that, for those of you who aren't aware, there is a bill in conference committee right now that will allow you to remit the foreign subs earnings at substantially lower tax rate. That's the benefit, whereas today if you bring it all back, arguably you're subject to at least the corporate statutory rate of 35%. Whereas if this bill passes, you know, on the face of it, you could reduce that tax rate to 5% and if you have NOL's and other things, maybe you could do it without any cash tax penalty, depending on how the bill ultimately arises. I mean this is substantial for us because we earn a lot of our earnings overseas and therefore the cash winds up being overseas and has to be deployed overseas unless you dividend back. This has a further impact on us because we've been in the mode of using our available cash to do stock buy backs. I would say we have completed our authorized buybacks. At the board level we have talked about whether we should expand those buybacks, but we've decided to table those discussions in the short-term because this whole tax issue would have implications for where we borrow, how we structure our borrowing, and so we don't want to do anything that gets us behind an eight ball as it relates to this tax change. So we think that's going Resolve itself in the next month or two is the current forecast. If it proves not to resolve itself, we will in all likelihood come back and relook at our buyback alternatives regardless of this, of this tax situation. Okay?

All right. Thanks.

Derik de Bruin UBS, your line is open.

Hi, thank you. Some of the smaller companies were talking about weakness in the overall proteomic market. Could you just comment on what you're seeing in that area.

Yeah, our-- the overall proteomics market, that when you talk to us, is largely the state of our Q-Tof business. Although to some extent our L CT Premier also plays in that market. Our Q-Tof market is-- Q- Tof business is soft, but it's hard to tell whether that's related to the fact that we've just introduced our new products, we're not shipping it yet and we're still in the marketplace with our last generation product in terms of what we're shipping. So we see soft conditions, it's a little bit massed by our particular situation. I can say that we have an outstanding quarter with our LCT Premier, which is a single staged mass spec in these applications and that did well in both proteins as well as low molecular weight applications. So I'd say, yeah, in summary, I think the proteomics applications are not that robust, but our specific situation is pretty unique.

Okay. When you talk about some of the new software and products for the new genesis, that's included in the HPLC revenue line, correct?

No. I'm pulling that out and I'm showing that as a separate acquired revenue growth, if you will. It's incremental to our base business that I described leading up to that.

Okay, and what-- you said the number for the quarter was 2.4 million, is that correct?

5.4 million.

5.4 million.

Right.

And the number, the gross you're looking for that in the acquired was 2-3%?

Yeah, we said that should add 2-3% growth to the total company for the year.

Okay, okay. Very helpful. When you look at the Acquity orders and all the people that are testing the system, how many of them are looking at the system with some of the-- I guess, you know, what is the mass spec combination they are looking at as the most favorable one for this-- I know you've got some higher UV protectors and I know you have lower end detectors and but I don't know if you're ready for the Acquity system. Can you just tell me how people are looking at that system.

Well in, terms of the base Acquity system, so when you think about Acquity, you think about Acquity UPLC and our newly introduced Nano Acquity The Nano Acquity really takes the separation down another notch and that's really principally aimed out of the shoot at proteomics applications and particularly with our Q-Tof instrument that we'll be shipping in the fourth quarter. So that's a proteomics type of application. With, with our base Acquity system, we are seeing interest in that. We're seeing concentrated interest with our LCT, single-stage mass spectrometer. We're seeing it interestingly with the Quatro Premier, in regulated bio analysis applications the combination of the Q-Tof -- I guess to put it mildly, I think, we don't think anybody can achieve the performance that we do with an Acquity and the Quatro Premier in regulated bio-analysis applications. And we're being reinforced in that through our customer demos.

Great. Thank you very much.

Daniel Chai, Merlin Biomed, you may ask your question.

Great, thanks. Can you just give me a little bit more clarity on the Acquity push-back into the third quarter. I, I think had you mentioned 5 million. Now, those are already booked sales or are these pharmaceutical companies that are evaluating products at an aggregate would account for 5 million in sales in sales in the third quarter?

These are actual orders.

actual orders.

They are actual shippable orders that, you know, are just like any other order that we take. So there is nothing conditional about it. It's just that we'll be fulfilling those orders through shipment of the product in the next two to three weeks.

Okay. And then the tax rate in the quarter, I think your guidance for the year was 22% is that still intact?

Yeah, 22% excluding unusual items. So, for example, in this quarter, the litigation settlement had a different tax rate than the 22, but from an ongoing operations perspective, yes, 22% it our current estimate.

Okay. All right. Thanks.

Sure.

Franz Tudor, Variant Research, your line is open.

Just a quick question. In terms of on the mass spec market, can you talk about any potential impact that the FTMS launches are having on that market?

Well, I think the FTMS launch, which was really a last year-- was the significant dynamic, certainly had an impact in the proteomics marketplace and, and probably had an impact on our Q-Tof business last year. We think that the expression system with the new Q-Tof Premier and Nano Acquity will be competitive with the FTMS systems and those applications.

Okay. Thank you.

Darryl Tardy, you may ask your question with Merrill Lynch.

Yeah, Doug, you touched on new genesis in your comments. I was wondering if you could discuss a little bit more on what you guys are doing integrating New Genesis and whether the Waters sales force has those products out in front of customers now.

Sure. I think that the basis of acquiring New Genesis was that customers really see the need for this broader vision of data management and that they really want to go further down that road, but one of the things they were most concerned about was putting so many eggs in a small company basket and that we saw that from customers as we talked to them about power and continue to get reinforced that if Waters offered this capability, customers would be more inclined to, to cast their lot. We've continued to see that. We continue to get strong encouragement from, particularly from big pharma. Every big pharma customer I talked to is evaluating a scientific data management initiative. I'd say we are-- our orders were a little bit slower than we anticipated this quarter, but we moved a little bit faster on integrating the full worldwide business. We changed managers and we integrated it more into the Waters sales force management. Really we knew we had to do that long-term because the whole advantage is to get this acting like a bigger company rather than as a small, you know, startup. But that probably had the impact of probably putting off a few of these orders that we had originally had on our drop sheet.

Okay. Was that related all to change in, change in the sales force at New Genesis or was it just internal?

Well, it was change in both. I mean it was, it was changing, you know, some of the people in the Waters sales force who were used to selling just in power are now train order a broader product portfolio and we'll be selling the full range of informatics products in a similar way, New Genesis people got further training on the lower end product, or the standalone product because the whole idea here is that you need to be able to position this entire informatics product line, including HPLC and mass spec data to that customer and that customer includes both the lab manager as well as the MIS manager for those sites. So that requires a little bit different selling process than our sales force was typically presented with.

Okay. That makes sense. That's very helpful. Thank you. Okay. Just one thing on the new building, I think you said it was 270,000 square feet.

250,000.

250.

Yeah.

What-- besides putting New Genesis there, what else are you going to use the building for? It's a lot of space.

Yeah, a piece of the space is going to be subleased for three years.

Three years. Yeah, 100,000 square feet.

So we're left with 150. We're going to be rationalizing the New Genesis space that we acquired with New Genesis and bring that altogether on one campus over the long-term. Additionally, we needed-- we're at the tail end of our ability to put more people onto our Milford campus. We have a piece of land that we could have built on and that was our plan and we would have broken ground next year and added another 50-75,000 square feet. What this does is for essentially the same-- for twice the space at the same cost, we are able to have expansion room here within our Milford campus.

Right.

This should, yeah, take care of our needs in the area for, you know, four or five years plus without M&A activity obviously.

Okay. Great. Thanks.

John Sullivan with Leerink Swan.

Hey, guys, wanted to follow up on an earlier question, make sure I understood the answer. Regarding Acquity for the remainer of the year, in the third quarter, John, you had said you're now calling for 8-10 million and that includes the Q2 backlog is that true?

That's right.

Then in the fourth quarter, you had said 12-14 million. That doesn't include any backlog from any previous quarters, is that right?

In all of these-- for the third quarter, we're shipping backlog as well as new orders, but we'll also be building a backlog in the quarter we presume, as well.

Right.

so, you know, every quarter you're taking down the backlog at the start and building it up at the tail end.

Right, right. So my-- so your point is that in the third quarter, your shipments number includes Q2 backlog and Q4 is de nova?

Correct.

Okay. That's all I needed. Thank you.

Frank Shandlee, Dudly Company.

Hi, Doug and John. I just wanted to ask a little follow-up on the question of the foreign earnings repatriation and maybe ask you to speculate a little bit, but, you know, if it does go through with the legislation the way you, I guess hope it would, can you give us an idea of what you would do with, say, $4-500 million, is that in cash, I'm assuming and would it all go to debt paydown or would you possibly consider paying a dividend or, you know, give us a little idea on that.

Sure. I would say that our-- our inclination has been to use excess cash balances to buy back our stock, and I can say that I think there is still a firm sense of the board that that's a very useful thing for us to continue doing, although there has been no vote taken at the board at this point. So I would say we don't, we don't see on the horizon on major acquisition. We see the next couple of years anyway being, you know, rolling out along some pretty strong vectors that we describe here with a very strong new product platform. With that kind of growth, we continue to generate, you know, $200-250 million of free cash, you know, once we--get moved on a little bit. So at this point, I would say to use that cash in all likelihood we'll consider maintaining a strong level of buyback. Does that answer the question?

Well, I guess the 4 -500 million that you could conceivably repatriate, would that, you know, you've been borrowing to buy back stock. Is that--

That's right.

You would pay that down or would you leave it?

I would say it all depends on rates.

Uh-huh.

We're not uncomfortable with maintaining some level of debt. The thing is, you know, at $400 million, it's less than two years of free cash. So it's, you know, I think the way I would phrase it is all other things being equal, even in the face of a repatriation, in all likelihood, we would strongly consider continuing a robust level of stock repurchases.

Okay. Thank you.

[INAUDIBLE] with Argus Partners, your line is open.

Good morning. Can I just get the revenues in the mass spec business, what was the trend and what was the guidance for the third quarter revenue growth?

Yeah, mass spec, we said grew 11% for the quarter. That was really driven by the triples, both the Micro as well as the Premier did very well. The LCT we talked about being a strong adder to that growth and the Q-Tof was relatively weak in that result. And we see that moving to the low to mid teens in the third quarter as we look at the overall guidance I gave for Q3.

That's of course without currency, organic growth.

Q-Tof is going go to low to mid teens, is that an easy comp or--

Mass spec.

Mass spec. What is the overall revenue guidance for the third quarter?

For the third quarter we're saying about 10-11% in the core businesses. A couple of points of growth from New Genesis, so 12-13ish percent standard currency 3-4, so we're looking at all in somewhere between 15-17%.

Thanks a lot.

You're welcome.

Mr. Chris Arndt, Select Equity Group, your line is open.

Yeah, I just wanted to make sure the guidance that you gave of $1.78 for the year, that's predicated off 37 cents in the first quarter and 40 cents in the second?

The guidance is pre any unusual charges, so I'm giving guidance on really a proforma basis. So 37 cents was in fact Q1. 40 in Q2 and then we said 42 for Q3. So obviously 59 no Q4. That's the $1.78.

Okay. Great. Then can you just repeat in the second quarter the operating cash flow Cap Ex and free cash flow numbers and you had them with the litigation settlement as well as with the Cap Ex on the building and without. Could you just redo both those numbers.

Yeah, sure. The-- we said there was 72.5 million of cash from operations and then there is a-- that includes a $17.1 million litigation settlement, so the net of those it would would bring you down to 55.4 million from operations without that settlement. Okay, and then on the expenditure side we said it was 27.1 million of Cap Ex.

Mm-hmm.

Including 18 million from the building.

Okay.

And then the net of that, if you pull both of amounts out, you get to 46 million for the quarter.

Okay. Okay. Great. Thanks a lot.

Sure . Hello? Brian? Hello? Hello? Hello? Operator ? Operator ? Is there somebody on the line?

Larry neighbor, Robert Baird.

Hi, Larry.

We can't hear anything. We've still got a line. We just lost an operator, I guess.

yeah, well, I'll ask my question then.

Go right ahead.

Are you already booking orders for the Q-Tof Premier and if so, a backlog, do have you there?

Well, actually we are starting to book orders in the second half for the Q-Tof Premier. We really launched that in June at ASMS and we're not really demonstrating it at that point. So there is no real backlog of that going into the second half.

But you are demo-ing it now?

Yes.

Okay. Isn't a six-month sales cycle, is what you'll need in order to get units out the door this year kind of fast for a new mass spec?

It's about traditional. I mean that's what we saw with the Q-Tof Premier. We launched that at ASMS last year and we're actually shipping that-- if we ship add few at the end of the third quarter and shipped in volume in the fourth quarter, I think we'll-- the Q-Tof Premier is a little bit more complicated than a tandem mass spec. That's why we're being a little bit more cautious about shipping late in the fourth quarter.

Okay, but how much Q-Tof Premier is built into your forecast for the year?

It's relatively, relatively the minimus. I mean we might have a handful of units that we are expecting to come in on orders in the fourth quarter and shipments, but I wouldn't say it's a large risk item.

Not a significant factor in our fourth quarter forecast.

Right.

Okay. Thanks.

our next question is from Ti-Cho Peterson.

Hi. Are you guys still looking at doing something in FTMS? I know you had the collaboration with IN spec, is that still an area of interest for you?

It's an area of interest, but we have no collaborations at that point.

Okay. Then other Cap Ex costs associated with the new facility for you guys next next quarter?

The operating costs associated with the facility we believe will actually offset by the reduction in rental income, principally in the fourth quarter as we take the New Genesis building off line.

The rest of the-- there are fixup costs in there, but they are within our normal--

Capital budget.

-- capital budget. Yeah.

We think we can fund that within our original expectations.

Okay. Thank you.

Jim Ferrotus with Alayan. You may ask your question.

Good morning, gentlemen. You spent some time talking about the demand you saw from pharmaceutical customers and a little bit of time on the government academic-type customers. Can you tell me what the percentage of your business is devoted to biotech, pure biotech customers and what you saw from those customers in this past quarter?

Well, we don't split our business up by pure biotech, but I can say that our biotech business wasn't the strongest area of our life science business. Traditional big pharma, particularly large pharmaceutical customers was the strongest piece of our business. We also saw some pretty good strong business from generic manufacturers. I would say biotech was on the weaker side this quarter.

And would that imply flat to down?

Yeah, flattish.

Okay. Thank you.

Once again, if you have a question, please press star-one. Sir, that the time, there are no questions.

Okay. Well, thank you very much for being with us this morning and we'll look forward to talking to you again in October.