Waters Corp (WAT) 2004 Q4 法說會逐字稿

Good morning. Welcome to the Waters Corporation Fourth 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 hosts for today's call, Mr. Douglas Berthiaume, Chairman, President, and Chief Executive Officer of Waters Corporation. Sir, you may begin.

Thank you. And good morning and welcome to the Waters Corporation fourth quarter financial results conference call.

With me on today's call, as usual, is John Ornell, the Company's Chief Financial Officer and Gene Cassis, the Vice President of Investor Relations. As is our normal practice, I will provide an overview of the fourth quarter results, and John will take you through the financial details and lay out our first quarter and full year 2005 outlook. Then finally, we'll open it up for Q&A. But before I begin, I'd like John to cover the cautionary language.

During the course of 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 Q1 and full-year 2005. 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 our 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 I under the caption "Business Risk Factors."

We further caution you that the Company does not obligate or commit itself by providing this guidance to update predictions. We do not plan to update predictions regarding possible future income statement results except during our regularly scheduled quarterly earnings release conference calls and web cast. Our next earnings release call and web cast is currently planned for April 2005.

During this call, we will be referring to certain non-GAAP financial measures; a reconciliation of the non-GAAP financial measures to the directly comparable GAAP measures that is attached to the Company's earnings release issued this morning. In our discussions of the results of operations, we may refer to pro forma results, which exclude the impact of restructurings, one-time charges and facilities related charges. Doug?

Thank you, John. Well, the fourth quarter financially was clearly the strongest performance that we've seen in several years. Our sales growth reported was 18%, and while that includes about 4 points of currency translation effect, we still saw real sales growth in the mid teens.

Our operating earnings per share was 62 cents a share or an increase of 29% over the fourth quarter of 2003. I also think it's important to note that, although, the fourth quarter was clearly our strongest, it caps off very good fiscal year results. Full year sales growth was 15%. The operating margin percentage improved to more than 25%, 25% of sales that is. And adjusted earnings per share increased 26% for the full year.

Well, the fourth quarter was highlighted by initial shipments of our new Q-Tof Premier mass spectrometer system and the continued growth of our ACQUITY UPLC system. The positive market momentum that we spoke of during the last call in October, affecting both our pharmaceutical and industrial businesses, continued as we finished up the calendar year.

Geographically, sales growth was well balanced with all major geographies delivering good growth. Asia continues to have the strongest growth with India and China in particular growing over twice our corporate average. As you'll recall, early in the year we were cautious on Europe, because of weaker conditions that we were seeing there, but as the year progressed, our business strengthened and the fourth quarter saw good representative growth on the continent.

From a product line perspective and on a constant currency basis, the fourth quarter's results have to be examined in light of 2003's fourth quarter, which had some uneven results in them. Mass spectrometry sales in 2003's fourth quarter were weak, and conversely HPLC sales were very strong. So against this difficult comparison, chromatography sales grew approximately 5% in the fourth quarter of '04.

Shipments of ACQUITY base systems met all of our expectations. I'll provide you more detail on ACQUITY program progress later in this talk. Mass spectrometry sales were up very strong. They were up over 40% for the fourth quarter, as the continued growth of our tandem quadrupole and LCT mass spectrometry systems were augmented by initial shipments of the Q-Tof Premier.

The Premier is a high performance instrument that we introduced at the ASMS conference in June. Orders for the new Q-Tof Premier, I think, signal strength in the discovery related segment demand. It should also be noted that shipments of our protein expression system, which is an instrument that combines the Q-Tof Premier with the nanoACQUITY UPLC and groundbreaking software tools for bioinformatics is planned to begin in the first quarter of 2005.

So, although, these strong mass spec results were compared to a relatively weak fourth quarter in 2003, remember, an unusually strong HPLC last year and weak mass spectrometry product sales. We are encouraged by the across the board strength that we see and the customer enthusiasm, particularly in systems featuring combined ACQUITY and mass spectrometry systems.

Finally, TA Instruments Division business continued to deliver strong results and very impressive year-over-year sales growth based on solid overall industrial spending. The expansion of the business within Europe also aided us, and we continued to see strong response to the thermal analysis product line worldwide.

Now, we'll return to the discussion of ACQUITY for a minute. With the introduction of this technology, we think the evolution and combination of liquid chromatography and mass spectrometry from separate and discreet product categories, now moving into smoothly melded systems with clear application focus has accelerated. When we acquired Micromass more than seven years ago, we foresaw a future that included the convergence and the integration of separation science and mass spec characterization.

During the past two years we have organized our business to best address this trend by merging the Waters and Micromass operation. And today we are well positioned to uniquely develop, sell and support instrument solutions that combine liquid phase separations and mass spectrometry.

We are seeing strong evidence of this trend with our proteomic systems, which combine ACQUITY, Q-Tof Premier separations chemistry, and Novel software. We're also seeing it in the fast-growing food safety applications around the world, featuring combined systems utilizing tandem mass spectrometers.

ACQUITY system sales in the fourth quarter were very strong and epitomize this trend of selling systems that are based upon a total LCMS' solution. In the fourth quarter, we shipped more than $20 million of ACQUITY base systems, including initial shipments of the nanoACQUITY with Q-Tof Premier. Installations of ACQUITY systems continued to progress smoothly and customer interest continues to build.

In 2005, we will build upon the launch of UPLC technology with volume shipments of the nanoACQUITY and the further introduction of new column chemistries to allow for the expansion of UPLC into new applications.

In 2005, we also expect to see ACQUITY penetrate into traditional HPLC applications more significantly, as the technology reaches higher levels of acceptance, the range of applications expand, and as customers see firsthand how ACQUITY UPLC can benefit even routine testing.

In the fourth quarter, we started to see uptake of the technology by generic drug manufacturers, which I think serves as evidence that customers are seeing the powerful productivity advantage of ACQUITY in core QC operations.

But needless to say, we continue to be very excited about ACQUITY. In 2005, we anticipate that an increasing percentage of ACQUITY systems will be shipped as part of the integrated LCMS packages, and also expect to see our competitors react to the success of our technology with systems that attempt to match some of its performance advantages. We feel that these competitive actions will serve to confirm the benefits of UPLC, and I can assure you that we are actively working to maintain a competitive lead.

Our lab informatics fourth quarter revenues grew sequentially in year-over-year, but they were, again, below our estimates. We did begin shipment of the eLab Notebook product, and I can tell you that interest in this new approach to organizing and recording laboratory processes continues to grow.

We now have, we believe, a strong set of product offerings in field sales and support structures to support growth of this new business initiative, and we're optimistic for an improvement in this area in 2005.

Turning to customer segments, sales to our pharmaceutical customers in the fourth quarter indicated a continuation of the steady performance we saw throughout the year. Despite recent publicity regarding issues specific to some of our large accounts, we expect a steady trend to continue into 2005 and are confident that our new product programs will continue to gain traction in drug companies.

Within the overall category of life science opportunities, we are encouraged by recent growth of LC/MS Systems to support clinical diagnostic applications. During the fourth quarter, we secured major new business for newborn screening instruments for governmental agencies in the United States, and we expect to surface more opportunities in 2005 for this application, as well as for applications featuring therapeutic drug monitoring. This broad area of clinical use of our instruments, although currently small, is one of the most rapidly growing applications we serve.

Outside of the life science space, we've been successful in selling LC/MS systems for Food Safety and environmental testing, principally in Asia, and this is very much an emerging application, and we expect our business in Asia to grow and for other governments to begin to impose stricter regulations that will, in turn, result in the geographical expansion of this opportunity.

The growth of these applications for LC/MS Systems in 2004 represent a significant shift in the business base for our tandem quadrupole LC/MS Systems and lessens our dependence on the classical drug metabolism and pharmacokinetics applications.

On the business development front, we continue to actively evaluate the acquisition of businesses, product lines, and technologies to augment our Waters and TA Instruments operating division. But in the meantime, we will continue to apply our strong cash generation to buying back shares of our stock through the $500 million program authorized by our Board last October.

So, in summary, and in reflecting upon our overall business performance in 2004, overall I am pleased to tell you that, I believe, we've passed through an inflection point in our recent history. In 2004, demand from our key customers in the pharmaceutical area improved from its levels in 2002 and much of 2003.

We feel we are passed both the initial and secondary effects of the patent situation that depressed our mass spec system sales for most of the past two years, and we are confident that we now have a complete and powerful mass spec product position.

Importantly, we feel we are on the verge of realizing the true business potential of the convergence of mass spec and liquid chromatography technology, and we'll continue to drive technological and business performance in a wide array of applications. Now I'd like to turn to John with a more detailed view of the financials.

Thank you, Doug, and good morning. Earnings per diluted share were 62 cents this quarter, four unusual charges, compared to 48 cents last year before usual charges, for an increase of 29%. On a GAAP basis, earnings per diluted share were 58 cents this quarter versus 47 cents last year.

And included in GAAP results this quarter on a pre-tax basis is a $4 million impairment charge for a technology asset related to acquired technology and the write-off of the remaining value of our investment in the European proteomics firm for $1 million.

Our business continued its positive momentum this quarter with sales growing 18% on a reported basis. This growth includes a foreign currency translation benefit of four percentage points.

Looking at product line sales in constant currency terms, sales of LC products grew by 5%, which was slightly less than expected, but largely the result of a strong base of comparison in 2003 where LC had a very strong quarter to finish the year. For the full year, LC sales grew 9%.

ACQUITY orders and sales continue to ramp up nicely, and we anticipate strong chromatography growth in 2005, led by UPLC products. Our mass spectrometry product shipments grew by 42% this quarter. Our tandem quadrupole instruments continue to drive growth within the mass spectrometry product line, and we are encouraged by the continued strong demand in this area of the market. Our initial shipments of our new Q-Tof Premier this quarter also contributed to growth in this product segment.

Growth was well balanced with all major markets delivering solid results. Our thermal analysis business continued its strong 2004 performance with revenue growth of 8% in the fourth quarter and 11% for the full year. We forecast continued strong performance of this business and believe new product introductions and continuation of favorable business conditions will drive growth in 2005.

Gross margin performance came in better than expected and was up by 100 basis points over Q4 last year. This was largely the result of favorable foreign exchange dynamics, along with the continuing success of our manufacturing cost reduction programs. For the full year, gross margins were up 30 basis points.

SG&A expenses increased 20% over Q4 last year and were up 13% for the full year. While we expected SG&A to grow slightly less than sales growth for the quarter, we incurred higher costs for Sarbanes-Oxley compliance and employee incentive plans versus prior year, in addition to incurring SG&A costs associated with the NuGenesis acquisitions that are incremental this year.

For the full year, SG&A spending grew about 2% less than sales growth. R&D expenses were flat this quarter and up 10% for the full year. Much of our R&D efforts were front-end loaded this year as we saw reduced project-related spending in the fourth quarter for the ACQUITY and Q-Tof Premier projects.

Operating margin, excluding unusual items, improved 140 basis points this quarter versus prior year. And for the full year, operating margin, excluding unusual items, was up by 100 basis points to 25.3%. Our effective tax rate, excluding unusual items, remains at 21% for the quarter and full year.

We are reviewing the opportunity to repatriate up to $500 million of past earnings from foreign subsidiaries under the American Jobs Creations Act of 2004. We expect to make a firm decision on this matter after the passage of the pending technical corrections bill later this year.

Before any impact from repatriation under this new law, we currently expect our tax rate to be 21% for 2005. However, we continue to pursue expansion opportunities at our Irish facility to further reduce our long-term tax rate.

During the fourth quarter, we purchased 1.25 million shares of our common stock for $56 million against our approved $500 million program. In 2005, we plan to continue to deploy excess cash flow towards this authorized buyback and look for synergistic acquisition opportunities in the analytical instruments and chemistry space.

At quarter's end, outstanding debt totaled 457 million, primarily related to borrowings in the US used to fund prior stock repurchases and recent acquisitions. Cash and short-term investments totaled $539 million, bringing our net cash position to $82 million at the end of the year. We are comfortable with the current debt -- level of debt on our balance sheet, and believe we have adequate flexibility to fund future share repurchases and acquisitions.

Just prior to year end, we closed on a new, unsecured, committed banking facility, which increased our borrowing capacity from $375 million to $700 million. The new facility provides for lower borrowing costs, more favorable covenants, a five-year term, and the ability to borrow in certain international subsidiaries, in various currencies.

We continue to maintain a healthy balance sheet with cash from operations of $69 million this quarter. Capital expenditures for the fourth quarter were $19 million, yielding net cash from operations of $50 million. For the full year, cash from operations net of capital expenditures is $193 million.

Exploring cash flow in a bit more detail, this year's $193 million of cash flow includes a building purchase of $18 million and approximately $4 million in net litigation payments, without which net operating cash flow would have been $215 million. For 2005, we expect to generate $230 million to $240 million of operating cash flow, net of capital expenditures.

Accounts receivable day sales outstanding stood at 76 days this quarter, up five days from Q4 last year. With the introduction of the Q-Tof Premier, we had a backlog of shipments made later in the quarter that resulted in a three-day increase in DSO. FX also caused DSO to increase by one day as well.

Inventories are up modestly over last year-end balances, principally due to foreign currency translation and inventory turns improved somewhat this year. We posted strong financial results for both Q4 and full year 2004, and believe that our business prospects for 2005 look bright as we continue to ramp up shipments of our ACQUITY and Q-Tof Premier and begin shipping our Protein Expression System.

We believe these conditions will allow us to grow organic sales by about 11% in 2005. Currency, at today's levels would add approximately 2% to sales growth, bringing reported growth to 13%.

We believe SG&A will grow about 2% less than sales growth, R&D will grow at the same rate as sales, and gross margins should show slight improvement. This should allow for a 50 to 100 basis point improvement in operating margin in 2005.

Continuation of the buy back program should reduce the fully diluted average share count by around 3 million shares in 2005. And putting all this together, and before adoption of FAS 123 mid-year, we expect earnings per diluted share of $2.13 for 2005 with the normal tolerance of 4 to 8 cents and before unusual charges.

For the first quarter, we expect sales growth of 13%, which includes a 2% benefit from foreign exchange. At this sales level, we expect earnings per fully diluted share of 44 cents with the normal tolerance of 1 to 2 cents for the quarter. Doug?

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

[Operator Instructions].

Our first question is from Tony Butler with Lehman Brothers. Sir, your line is open. I'm sorry, he is disconnected. Larry Neibor with Bob Baird, you may ask your question.

Thank you. Good morning.

Good morning, Larry.

With the market you're addressing seeming to shift a little bit away from metabolite analysis to pharmacokinetics, could you give us some idea of the relative market size between environmentals, food and beverage, or the other markets where you're doing better versus the metabolite analysis market?

I think the absolute size right now, is quite a bit smaller in the food safety and the environmental sectors, Larry. The difference is that pharmacokinetics and drug metabolism is a more stable market, where food safety and environmental are growing much faster. So -- in talking about the market size, it's really not that easy to peg it right now because of the new initiatives.

I think the newest initiative in '04 and '05 on the food safety front is really Japan, whereas the EU was pushing most of those food safety regulations prior to that point. I think as you know, the US is a distant third or fourth in terms of those regulations. We think that that will change over time. But I'm not really comfortable about citing an absolute market size other than to say, they're growing much faster.

And which market is the driving force on the environmental side?

In which geography?

Right and what is the driving force in that geography?

You know, I would say the strongest growth last year was in Japan because of the drinking water regulations. But I would also say that we had very good strong double-digit growth in those applications in North America and in Europe. So, Europe now has been driven dioxin analysis amongst other things, and probably in both Europe and the United States and in Japan pesticide analysis has been a key application driver.

Great. Thank you.

Sara Michelmore with SG Cowen, you may ask your question.

Great. Thanks for taking my question. Just a question on Q4, and then a question on the outlook. You know it looks like you came in well ahead of what you had planned for ACQUITY in the quarter. I think you were looking for 12 million entering the quarter, and you put up a 20 million number there, yet the HPLC growth was lower than your expectation on the total. So I'm wondering if there's a higher cannibalization of the base business or if there's anything in the base business there that we should be aware of?

Sara, it's a good question, and a very fair question. Two things that I think are important. Number one, we -- is this phenomenon of the base quarter versus the current quarter, and we had a very strong HPLC quarter in the fourth quarter of last year, actually a little bit stronger than any incoming order rate, because, backlog came down a little bit in the HPLC business. We had the opposite phenomenon in the fourth quarter this year.

The underlying dynamics are stronger than the ship rate in the fourth quarter of '04. And so, I think, the focus on that -- personally, I look at that 5%, and it's just not indicative of what the underlying results are. I mean, I'm much more comfortable thinking about, you know, very high single digits, low double digits as kind of the underlying liquid chromatography dynamic. And I'd say that's pretty much what we expected in terms of incoming results. We were maybe a little bit, you know, a smidge lower in versus what we expected, but nothing dramatic.

Okay. So you think of it more in terms of just kind of order flow and timing issues more than anything else?

That's right. I mean, we -- frankly, we're trying to ship all important customers and get it all into the quarter and looking at what our financial plan was for the quarter. We tended to focus on our overall shipment plan rather than on the product line shipment plan. So I don't think you should read too much into that, that split in terms of HPLC and mass spec.

And frankly, 40% plus growth in mass spec, while indicative of what the underlying order rate pattern was, was also against a pretty weak fourth quarter last year. So, I'm very happy about our mass spec performance, but 42% is certainly higher than I'd expect, you know, the true momentum in the marketplace being.

Great. That's very helpful, Doug. And then in 2005, can you just give us a sense on that 11% organic growth target, what roughly are you expecting for liquid chromatography and mass spec? And I know, if you can just talk about in terms of the full year, and then I know in Q1 particularly, you've got another easier mass spec comp and then a harder LC comp, just kind of what you think about for the balance of the year.

Sure, will do, Sara, but I'll ask John to do that. All I want to do is, we're going to -- we're kind of in this transition period. We're trying to continue to provide data on both, you know, kind of a product line basis, as we have traditionally, but it really is a situation where we are focusing on systems that contain separation chemistries and instruments and mass spectrometry.

So this distinction of what exactly is a discreet LC system versus LCMS is getting blurrier and blurrier in how we price those systems and how we promote them. So, I think what you're going to see is much more talk about how we're doing in food safety, how we're doing in pharmacokinetic kind of situation, and probably less and less about what a discreet LC growth rate is versus mass spec, but we tend to still do that right now.

Sara, as it relates to 2005, on a full-year basis, we're looking for HPLC to be high single digit, perhaps approaching 10% as we look at the full year. And mass spec is likely to be in the mid teens growth as we look at the full year. But as you pointed out, in the first quarter, we have a rather similar comparison to Q4 from the perspective of Q1 had 16% HPLC growth in the base, and mass spec actually went down 19% in the first quarter of 2004.

So, against that base of comparison, we're more likely to show mass spec results that are 20% plus again in Q1, and HPLC is likely to be mid single to high single digit as we look at that base of comparison.

Great. And just my last question; I'll get back in the queue; I'm just wondering why the gross margin guidance seems to be modest. And if I look back on when you guys were really going through a big mass spec cycle several years ago, you really saw some kick-up in the gross margin. I'm just wondering what the dynamics are in the gross margin line, if there's anything we should look for there.

Yes, on the gross margin front, we do try to be a little bit conservative there, given the fact that we have, in the past, spoken about ACQUITY ramping up and not having yet the same margins as Alliance and the other higher volume products enjoy.

So we will be looking to improve that margin certainly as we go across the year. But that will tend to damper a little bit the improvement that we would otherwise expect to see with the Q-Tof growth coming into the market space that, you're right, would otherwise tend to drive the margins up a little bit.

Great. Thank you so much.

Sure.

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

Good morning, guys.

Good morning, Darryl.

The $20 million of ACQUITY shipments in Q4, did that include some of the Q-Tof shipments?

Yes. The $20 million, Darryl, is the total system value of what was shipped that includes ACQUITY. So, as you know, we don't try to -- we don't break out the units or specific dollars associated with ACQUITY, but if we look at the system sales, whether they be Q-Tof or triples, where ACQUITY is a portion of that system, that's the value of the shipment in that quarter.

Okay. Thanks. The protein expression system, is that still slated to begin shipment this quarter?

It's going to start late first quarter, early second quarter. It still looks good. We never anticipated a large bolus of business until we got through the first quarter. But it still looks good for introduction in the first quarter.

Okay. Is that available in demo labs for customers to evaluate?

It's available in our demo labs, yes.

It is, okay.

We are running customer samples now. But, it still needs to ramp up more as we go through the first quarter, but we are beginning to do that.

Okay. John, the new credit facility...

Yes.

You said that brings down your interest expense. Can you quantify that?

Currently it's LIBOR plus 50 instead of LIBOR plus the 100. We're looking at for the full-year 2005, as we; at least, today try to model out cash flow. We're looking at net interest income and net of interest expense being relatively flat, zero, to maybe a $0.5 billion hit in the year. So it's allowing us to land in that place and continue to fund the share buyback program.

Okay. And some of that's going to depend on the timing of repaid cash repatriation?

Absolutely. Once I mean that decision is made, that will have some amount of impact on this whole model, and we can discuss that hopefully on the Q1 call, should we have made a decision by then.

Okay. Thanks. And just lastly, the higher than expected employee compensation expense in the fourth quarter.

Yes.

What was that related to?

Just the fact that in the fourth quarter we didn't anticipate the 62 cent result, so as we looked at the various plans that needed to be trued up, that was really the factor that brought the expense up in the fourth quarter.

Okay. It was an earnings-driven?

Yes.

Okay.

Earnings and divisional performance.

Okay. Great, thanks.

Yes.

Derik deBruin, UBS, you may ask your question.

Hi, good morning. One of my questions has been answered, but I just want to get a little bit more color on the Informatics business NuGenesis business. Could you just talk about the performance in the quarter? I believe that you said it was a little bit below expectations, and I guess just how you see this business going into 2005.

Sure. For those of you who haven't followed all of our Informatics discussions, we acquired NuGenesis just about a year ago in February of '04. And NuGenesis has a product line that focuses on scientific data management. Our millennium and empower systems, as well as our mass spec data kind of help feed that overall scientific database to help particularly, pharmaceutical companies manage their electronic records and database management processes.

We proceeded to kind of reorganize the Waters and the NuGenesis sales forces to address what we think is a major strategic opportunity, and we were disappointed in the net results of that in 2004. A couple of reasons. We were slow on getting the latest version of the database of the SDMS software into the market, and we were slow in getting the electronic lab notebook into the market, which is part of this whole Informatics process. As well as the effect of reorganizing sales forces around the world.

So we think some of it we did to ourselves, some of it the market was probably a little bit slower than we thought in coming to the growth rates. And so as we exit 2004, we clearly didn't achieve our objectives in '04. We think we go into '05 with the product line, the eLab notebook, the scientific database management products, in good shape. We’ve got people who are budgeting at the front end of the process, and we're optimistic that we'll see high growth rates in this market.

Now it's off a small base. The overall revenue that we're talking about in the -- in the fourth quarter, little, it's between $5 million and $10 million, I'm comfortable with phrasing it that way. So we think it's going to ramp up quickly, but, you know, we're probably six months off what the pace we thought we'd be at.

Okay. That's handy. And I guess, could you just talk about what you're hearing from your pharmaceutical customers in terms of their repatriation and, if you think there's going to be an increase in the R&D activity as this money comes in for them?

I think they're being pretty close to the vest the way most of us are until some of these technical interpretations are clearer. But I don't think in the end that much of this money is going to be used for dramatically increasing R&D programs. You know, I think the R&D programs are, long-term perspective of where they have -- they think they have to get to, and I think it's unlikely that you're going to see them remit, a $1 billion and use it to dramatically increase our existing R&D programs.

Okay. And just on one final question, could you talk about some of the column extensions, you're going to be doing for ACQUITY? I know that the current column offering - the CA (ph) column, could you just talk about, how you're going to be extending that product line.

Yes, although we definitely are going to have a CA, we're definitely going to have SL (ph), so I know we're -- we've got those, as well as we're going to be launching different geometries, different lengths of columns. We think -- clearly those were the chemistries that the marketplace most focused on when we introduced the single chemistry with the ACQUITY.

Surprisingly, though, even with that single chemistry, with the power of that system, we're seeing a great response because of the separating power and the versatility of the ACQUITY system. So we think this will help, but it may actually help more in just in the aura of having more chemistries rather than as much in the actual separation itself.

Great. Thank you very much.

Larry Neibor with Baird, you may ask your question.

Thank you. I think you mentioned that you're anticipating a competitive response to ACQUITY in 2005. Could you expand on that a little bit?

Sure, Larry. I can say, this is kind of -- at this point is still largely hypothetical. But I do think we have brought more customer groups through our building in the past year than -- and you know we do that every year, but this year even more so.

The share of mind that I think ACQUITY has in the analytical marketplace is very high, and so we already see a dynamic where competitors are trying to say, we can do it, we can do this, just watch this space for further notice, we'll be introducing a system. So it's that aura of competitors trying to position themselves around ACQUITY that you hear bubbling up through the customer set more than anything.

There is nothing that I would say sits out there and competes one on one with ACQUITY today. It just is not happening, but you have more competitors talking about small particles and trying to pack small particles, then they try to ramp up the pressure requirements on their systems.

We don't see anybody who is getting ACQUITY-like performance, because it really is a system dynamic, and as you recall, the big advantage that we had was we have a proprietary separation chemistry with the 1.7 micron particles, and then designed the whole system, really, around that separations chemistry. We think, and we have a proprietary position there, we think that's going to be very hard to emulate. So -- but if you are at PITCON this year, I suspect you'll hear many, many people in the LC business talking about ACQUITY-like systems.

Okay. And one final question, how has column usage been for your ACQUITY customers versus your expectations?

Well, you know, it's a frank answer, I think, it's still too early to tell, because we're shipping three ACQUITY columns with each system out there. So we're not really -- we don't have enough history to really see what the consumption is.

I can tell you that, you know, one of the strategic risks when we started down this path was what would column life be, because if column life was too short, we're going to have customer satisfaction issues. And column life has been very good. We don't think we have any customer satisfaction issues on the column life side. So, you know, we'll probably be better positioned to comment on column consumption over the next six months.

Great, thank you.

John Sullivan, Leerink Swann, you may ask your question.

Hey, guys, good quarter. Two quick questions. First one is, in previous years you improved sales by things like combining sales forces, going direct in various territories, etcetera. These have provided inflection points. Is there anything from an initiative standpoint in sales that can help the company's revenues in 2005?

Let's see. We don't have any reorganizations going on, and we don't have any of these -- I say none, but I believe we have none of these small distributor territories turning into subsidiaries, John. I'd say in terms of the most remarkable, continues just to be the Indian and China territories that are very strong.

We continue to add resources there, and it continues to be extraordinary opportunity, I would say. So that area of the world -- Asia in general, India and Asia in particular, and I'd say disproportionately, you've got the TA business and the mass spec business, where traditionally two or three years ago we were using distributors. Now all of that business is driven essentially through Waters sales forces. We're better able to invest and we're better able to take advantage of that growth opportunity.

Thank you very much.

So I'd say that's the most remarkable.

Thanks. When you talk about India and China being strong, I think of that as HPLC in generic -- and generic pharmaceutical manufacturers, I mean, broadly, is that a particularly strong customer group in that part of the world?

I'd say that's very strong in India. You know, disproportionately in India, but in China, it's a much broader base of government-funded analytical labs, food safety, environmental analysis. You know, China has a lot of industrial applications, whereas India is heavily pharmaceutical based.

Okay, understood. And my last question is, you spoke briefly about rolling out a nanoACQUITY system in 2005. Have you -- what have you got, if anything, from nanoACQUITY revenues in 2004, and if nothing, when will a nanoACQUITY be available to customers in 2005?

Yes, we did -- for those of you who you don't know, nanoACQUITY, if you think about in the old configurations, you had normal scale chromatography, and then you had capillary scale. Well, the new dynamic would be ACQUITY scale and then nanoACQUITY.

NanoACQUITY now takes on the microscale fluidics, particularly in proteomics and bioapplications. And principally, this nanoACQUITY is part of a system that includes LC or UPLC and a Q-Tof or some other form of mass spectrometer, but largely Q-Tof at the current moment. We shipped a handful of them in the fourth quarter, John, and we anticipate, as we go through 2005, it wouldn't surprise me as we get through the second half of 2005 that a disproportionate number of Q-Tof will come with nanoACQUITY, because the proteomics application is looking pretty strong. Great deal of interest in proteomics after a year or two or perhaps a little bit lower growth. And so the interest in the nanoACQUITY and Q-Tof Premier is very strong.

Okay, thanks very much.

Tycho Peterson, JP Morgan, you may ask your question.

Yes, I'm wondering if you can comment a little bit on the service business, where you are in terms of build-out, you know, what you think that would do in '05 to the extent that you can quantify it.

Sure. Again, when we talk about service now, it's certainly in the Waters division. It's mass spec and HPLC systems. One of the dynamics that we've seen over the last several years as we've moved the mass spec into the classical Waters management structure is that we've been able to penetrate much higher with service plans and service support across that broader mass spec arena.

Our service business has been growing in the low teens for the past, well, three to five years. And I would anticipate that you're going to see those kinds of -- that kind of performance in 2005.

Okay. Can you comment on the consumable versus instrument mix in the quarter?

Yes, I can say that actually consumables were a little bit softer than we thought in the fourth quarter. I hate to blame the calendar, but, as a matter of fact, we had actually fewer selling days because of the way Christmas and New Year's fell in our – our consumables division tracks selling days and operating days very carefully. We had two or three fewer days of consumption in the quarter versus the base year, and so we had a little bit -- frankly, hadn't been anticipated in our budgeting exercises.

So we had, you know, where we've been running low double digits growth in chemistry, we were a little bit less than that in the fourth quarter, but we don't think it's anything fundamental. We think we'll be looking at that kind of performance as we go into 2005, and this is roughly 10% of our worldwide business, just a little bit more than it, that's about 10%, 10% of our worldwide business. And service is about 25% of our worldwide business.

Okay. And then finally, you know, I know it's not a huge product for you, but you did say in the third quarter that the Molotov had done fairly well. Is that still doing okay? Is there any...

Yes, it continues to do okay in the fourth quarter, but I caution you, it's a small product line for us. The LCT, the single stage mass spectrometer, which is used with a liquid chromatograph, continues to do very well. We introduced the current version of this product in late '03, and since introduction, it's done very well. And we anticipate that will continue to do well next year.

Okay. Thank you.

Our next question is from Tony Butler with Lehman Brothers. Your line is open.

Thank you, and good morning. Three brief questions, if I may. One, Doug, you alluded to demand pickup in Europe. Question is whether this is simply the fourth quarter phenomenon, or do you have some early indication that Q1 and perhaps part of 2005 may also be strong?

Okay, you want to give me all three, Tony or you...

Sure, I can do that. The second really is alluding to your comments regarding the blurring of LC/MS and the idea that Waters was in a transition. The question becomes whether or not this is occurring earlier than you had projected, and if that's true, what was the catalyst for that occurrence earlier than projected? And then finally, a simple question on thermal analysis. You've alluded to HPLC and MS growth for 2005. Can you make some comments about TA? Thank you.

Sure. First of all, may be the blurring of LC/MS, I would say the day we made the decision to acquire Micromass, a fundamental part of our decision was our belief that the attributes of separation, science, and mass spectrometry characterization were going to drive system performance over the long term. So I'd say we always had this vision. We had it particularly strongly at the bench top level, or at the single stage mass spec side, and we've been very successful in driving that and taking the performance of the LC and the mass spec and really getting the customer to view that as a systems performance rather than a mass spec system or an LC system.

But at the time, we had this high-end mass spec business that, you know, we were worried about whether the Waters sales force should be selling high-end mass spectrometers. You know, the Waters sales force was used to selling $40,000 systems. The mass spec side was selling, you know, up to $500,000 and $600,000 systems. We were worried about how did the customer really look at the various suppliers. We acquired Micromass in September of 1997, so I'd say since then we've been trying to drive this vision both in the way we organize, the way we approach a customer, that we are solving a customer's problem, and we're focused on applications. I think the new, you know, Protein Expression System is a perfect example of that.

Some of the environmental applications, the drinking water applications, for example, are perfect examples of that, that are now coupling ACQUITY with tandem mass spectrometry, where the attributes of the separation and the particular power of a mass spec are both very important, and customers are talking about the Waters, you know, drinking water system, not talking about a Waters triple quad needed to do the analysis. So I'd say we've had this vision, we've been organizing.

We've been driving our -- both our development and our marketing and our sales to it. It's not all there yet. I'm not saying that the whole market is converted over to a view of this. Some people will talk very differently about an inlet to a mass spectrometer. But we see it partly because we believe it and are driving it, and we're seeing it -- we're seeing the success from it. I think the proteomics and the expression system will be an interesting next level of this as we go through 2005. So I'd say it's happening about, as I would have expected.

The demand pickup in Europe, I think it still should be noted that the strongest demand we see is in Asia. The next strongest area is the Americas. And Europe is third as I think about the underlying demand in these areas.

But in the first quarter of '04, you know, we saw flat demand in Europe, and that was what kind of caused us to be cautious about whether this was a long-term dynamic, was it just us, was it the marketplace, and we saw that kind of be a first half dynamic in Europe, so flattish kind of demand, while in the second half, we saw it average out in the double digits. We thought we'd see that. Our customers were telling us that they had some programs that were delayed, and so that didn't shock us that Europe improved.

I happen to still think that Europe is going to be the weakest of the three large regional areas. I think Europe's got problems in terms of, you know, their willingness to fund major new initiatives, and I think pharmaceutical companies, if they look around the world and they'd say, where are they most likely to put their incremental investment dollar, I think Europe's probably third on their list.

So for our major accounts, I think they're investing generally outside of Europe rather than inside of Europe. I think its okay for us. I think the overall demand is still going to be good, but I don't think it will be disproportionately in Europe. And finally, thermal analysis. John, you want to talk about thermal?

As it relates to thermal analysis and our thinking on 2005, while we came off of a very strong year in '04 with 11% growth, we're going to be a little cautious in '05 and our plan incorporates about a 8% or so growth in thermal. There's probably some upside to that as we look at a couple of new products that are going to be launched first half of the year that could improve that situation, but we're going to start with an 8% thought on TA drive -- growth in 2005.

Thank you, Doug and John.

You're welcome.

Darryl Pardi with Merrill Lynch, your line is open.

Thanks. Doug, can you elaborate on Waters' opportunity in clinical diagnostics and newborn screening?

Sure. We're excited about it. It's a -- you know, HPLC has been used very modestly in clinical applications over the years. There've been some drugs that have traditionally used HPLC for drug monitoring. I think Theopelin (ph) has traditionally been one. It's been very small served application as opposed to, you know, the traditional clinical drug analyzers. What you're seeing -- and this broad phrase of clinical includes a lot of different things. You probably all heard about neonatal screening.

As you know, most babies get a heel stick and get evaluated for PKU, as well as a few other newborn metabolic disorders. But that's not a national standard. You have some states that do it, some states that don't, some just do a narrow array of disorders, some do a broader array. I'd say in '03 and '04, you began to see that pick up, and we see a great deal of inherent demand for that neonatal screening application, that we are a strong contender for.

We typically do that with some partners, but we access that market pretty significantly, both on a US basis, as well as an international basis. And that application is growing strong double digits. In the area of other clinical applications, in particularly therapeutic drug monitoring, you see major growing applications with anti-rejection drugs for transplants where mass spectrometry, particularly Tandem Mass Spec, offers advantages typically over the ELISA type tests that have been the norm.

So we have now organized a little more specifically to address the clinical marketplace. We have dedicated some resources in Milford that will be solely dedicated to application development and sales and support of the broad clinical marketplace, and I'm very confident that we're going to continue -- we're going to see growth rates in this area of the world of our market, at least twice of the corporate average.

Okay. How big is it? Like what's the revenue run rate approximately?

Well, our clinical business -- I don't like to get too.

Okay, just give us, I mean, is it -- is it a few percentage points of sales, or is there something that's less than that at this point?

Well, it's currently less than $50 million, but its growth rate this year was over double the corporate average, and we see that continuing. So, we certainly can see this being $100 million piece of business within a three or four-year time frame.

Okay. And on the neonatal screening, what are the products that are used there, you're selling?

Now, our product typically is an HPLC or a UPLC and a Tandem Mass Spec. That can be either the Q-Tof -- excuse me, the Quattro micro or the Quattro Premier.

Okay. Great. Thanks, guys.

You're welcome.

John Sullivan, Leerink Swann, you may ask your question.

Hi, guys. Earlier in the call, there was a comment about a mass spec market shifting away from pharmacokinetics and metabolite analysis. Are you seeing that among your pharmaceutical industry customers? Is the traditional Triple Quad, Tandem Quad application late in development actually -- are revenues from that indication actually slowing?

John, I might have misspoke. I'm talking about our business and our preponderance of sales, it is really disproportionate growth rate. Our growth in Tandem Mass Spec has been highly influenced by food safety and drinking water in Japan and environmental analysis and neonatal screening, and that, you know, could be a competitive dynamic.

That could be a dynamic of the fact that we're focused on, you know, the broader customer applications that we’ve traditionally served, could have to do with product differences, us versus the competitors. We certainly still service the pharmacokinetics and DMPK, but our penetration there hasn't traditionally been as strong as developing these new market opportunities.

The other thing that we've done in Triple Quad or Tandem Mass Spec is a broad characterization of this coming together of the traditional HPLC and mass spec product lines and sales forces, where we've been able to very effectively -- where we might have traditionally sold a single quadrupole mass spec by a wider sales force.

In a lot of applications, a customer could have a real desire for MS/MS type of analysis, and now that the salesman has all of these products in his bag, he's not competing with a mass spec sales guy. We've seen very good success in upgrading customers from single quadrupole systems to MS/MS systems. So all of those dynamics are driving our tandem mass spec business a lot faster than the traditional DMDK applications.

All right. I appreciate that. Thank you.

[Operator Instructions].

I think, operator, maybe we could take one more. I'd like to be careful with people's time. There are a lot of other conference calls going on today. So, maybe, we could take one more question if there is one.

At this time, there are no questions.

All right. Great. Well, thank you very much. As you can tell, we're pretty excited about the current state of the business, and we'll look forward to sharing that with you in our next call. Thanks.