Waters Corp (WAT) 2005 Q4 法說會逐字稿

Good morning and welcome to the Waters Corporation fourth quarter financial results conference call. All participants will be in a listen-only mode until the question-and-answer session of the conference. This conference is being recorded. If anyone has any objections, you may disconnect at this time.

I would like to introduce your host for today's conference call, Mr. Douglas Berthiaume, Chairman, President and Chief Executive Officer of Waters Corporation. Sir, you may begin.

Thank you. Well, good morning and welcome to the Waters Corporation fourth quarter financial results conference call. With me on today's call is John Ornell, the Company CFO, 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 then John will take you through the financial details, and lay out the first quarter and full-year 2006 outlook for you. And finally, we'll open it up for Q&A.

But before I begin, I'd like John to cover the obligatory 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, at this time for Q1 and full-year 2006. 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 uncertainties 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 31st, 2004, Part 1 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 April 2006.

During this call, we may be referring to certain non-GAAP financial measures, a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure 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 fact of restructuring, one-time, and facilities-related charges.

Thank you, John. Well I'm pleased to report to you that our business improved in the fourth quarter. Though we did not see a significant rebound in big pharma spending. That weakness in pharmaceutical spending was largely offset by strong geographically broad-based Liquid Chromatography demand and continued robust sales growth in Asia. Our 7% top line organic growth in the fourth quarter enabled us to grow earnings by 18%, in comparison to what was a very strong fourth quarter result in 2004. But reflecting upon the full year's results, the persistent weakness in demand from our large pharmaceutical customers clearly stands out as an important issue.

As we move into 2006, we are closely watching for signs of a recovery in big pharma spending. However, without a clear indication of a significant pickup in sight, we will maintain a conservative outlook, and manage our business in a manner that will deliver meaningful growth in earnings, while assuming relatively modest top line expansion.

Returning to our fourth quarter performance, the clear highlight was our ACQUITY systems sales. Sales for ACQUITY-based systems exceeded our expectations. While our traditional alliance, HPLC Instrument Sales also grew very nicely. Of note, we began to see purchases of multiple UPLC systems on a single order, as some customers decided on full lab implementation of this new technology. Interestingly, these orders were from customers largely outside of our targeted large pharma base. ACQUITY system penetration within the big pharma base continued in the quarter, and we feel that we're poised for significant growth in this market segment when the spending environment improves.

Geographically, sales growth rates in the quarter and for the year were most rapid in Asia, where strong performances by our operations in India, Japan, and Korea led the way. You may recall that Europe was soft at the beginning of the 2005. Particularly as our large pharmaceutical accounts delayed spending in the first quarter. In the fourth quarter, the situation in Europe was markedly improved. We saw some pharma spending stabilize, and industrial spending continued at a comparatively healthy clip.

Turning to the U.S., and looking at the full-year results, our non-pharma business, led by food and environmental testing, drove sales growth, while our overall pharmaceutical segment was flat. These dynamics continued through the fourth quarter. However, in the quarter, I must tell you that the pharmaceutical story is somewhat interesting, in that the weakness was in no way evenly distributed. In fact, our specialty, generic biotech pharmaceutical customers, delivered relatively strong growth throughout the quarter, while our large ethical accounts were more conservative with their spending.

The issues facing big pharma are well-documented in almost every newspaper and business journal you read these days, and overall, a combination of factors, including concerns about the new drug pipelines, the residual effects of mergers and litigation woes, have all likely contributed to a cautious spending environment, especially for large capital items.

For Waters this has resulted in some of our larger accounts significantly reducing their spending with us in 2005, in comparison to their 2004 levels. We do not anticipate a dramatic turn around for big pharma in the near term. However, I feel that these accounts will eventually return to a more normalized spending rate, as they continue to seek new therapeutic products, and comply with the testing required for drugs already in production.

This need by our customers to innovate and improve productivity, is dramatically reflected in the fourth quarter's chromatography business performance. Nearly all facets of our Liquid Chromatography business showed strength in the fourth quarter. With the quarter's ACQUITY UPLC sales reaching another quarterly high. You may recall that when we first introduced our ACQUITY UPLC system in 2004, we focussed upon the many benefits of this exciting technology to our pharmaceutical customers. In fact, the lion's share of early adopters were researchers at large drug companies.

As we moved through 2005, we began to see a broad uptake of ACQUITY among the wide variety of customer groups using HPLC. It's this proliferation of this technology across many LC applications, that's driven it's growth in a tough year for pharma spending. 2006 promises to be another exciting year for ACQUITY.

In fact, we believe that current ACQUITY users in labs all over the globe, will be actively promoting this technology's advantages to their colleagues, and thus stimulate demand for new placements. I think you should be confident that Waters will actively push ACQUITY UPLC technology ahead in 2006, with meaningful enhancements that will widen the performance gap, in comparison to our competitors' offerings, and further expand the application reach of this exciting technology.

Our Mass Spectrometry business grew only slightly in the quarter, and only slightly for the full year. The performance in the fourth quarter was heavily influenced by a very difficult comparison to the prior year's quarter, when our MS business growth was about 40% in the fourth quarter of 2004. However, for the year, we definitely had our share of challenges, and overall delivered sales that were less than we had expected.

Looking more closely at this business, the weaknesses that we experienced were particularly in our single quadrupole, and in the lower-priced triple quadrupole segment. This weakness was mostly pronounced in the large pharma segment of the market.

On the other hand, the Q-Tof Premier and the Quattro Premier XE both in their first full year of commercial availability during 2005, experienced strong double-digit growth in the quarter and for the year. Interest in high-end Mass Spectrometry, driven by Proteomic, metabolite identification, and industrial applications remained strong. And our new product offerings in this marketplace will likely continue to stimulate demand.

Looking ahead into 2006, we feel that the combination of ACQUITY with Mass Spectrometry will be a important factor in driving overall mass spec sales. In addition, we plan to introduce new spectrometry quadrupole systems. In the high end research driving segments, we plan to launch additional capabilities to build upon our recent successes. We anticipate that these new initiatives will likely have the greatest impact in the second half of 2006.

Our industrially-focussed TA Instruments division had another successful year. TA's success came from a combination of healthy end markets, superior performing instruments, and very successful operational execution. 2006 will likely be another strong year for the division, due to a rich new product pipeline, and an anticipated continuation of capital spending by TA's customers.

Before I turn the call over to John, I'd like to mention that last year at this time, it seemed as if 2005 would be a strong year for us. In fact, this future did not unfold as we expected, and the year was more difficult than anticipated. But it's during periods like these, that we can more clearly see important aspects of Waters business model. The greater-than-expected weakness in pharmaceutical spending certainly highlighted the extent to which Waters relies on this market segment.

On the other hand, our results also demonstrated several strengths, and these strengths include the resiliency of our Chromatography Chemicals and Service business, which continue to grow very nicely, the strong positive impacts of our new product launches, such as ACQUITY UPLC, and Q-Tof Premier. And finally, the fundamental profitability and cash generation aspects of our operations.

Throughout 2005, we funneled these profits into an aggressive share repurchase program, while continuing to fund development programs that will drive our future growth. Putting all these business factors in perspective, and comparing Waters to its peers, or really any investment alternative, our cash-generation capacity stands out as rather exceptional.

Looking at 2005, with about $254 million in free cash flow, and a rough share count on average of about 115 million shares outstanding, our free cash flow per share was about $2.20. We're proud of this statistic, and we're confident that we can continue to grow our cash flow at an impressive rate going forward. With the 2005 experience very fresh in our minds however, we're forecasting our 2006 outlook cautiously.

The strong finish to 2005 is encouraging, and we feel that an upturn in pharmaceutical spending in 2006, could allow us to perform at a higher level than we currently anticipate. Independent of market conditions, let me assure you that we will diligently work to preserve the operational and financial principles, that have allowed us to deliver a superior record of long-term growth and profitability.

Now, here's John with a more detailed view of the financials.

Thank you, Doug, and good morning. Our fourth quarter results exceeded our expectations with non-GAAP earnings per diluted share of $0.73 this quarter, compared to earnings of $0.62 last year, an increase of 18%. Versus our previous Q4 guidance of $0.64, higher sales volume added $0.03 to our expectation, our full-year effective tax rate added another $0.03, favorable spending added $0.02, and finally, favorable stock buyback results added $0.01.

On a GAAP basis, earnings in the quarter included both the write-off of an investment and the sale of another investment that in total netted to a $3.1 million charge. In the fourth quarter of 2004, the GAAP results contained $5 million of charges related to an acquired technology impairment, and a writedown of investment. Including these entries, fourth quarter 2005 EPS grew 22% on a GAAP basis. Sales grew 7% for the quarter versus last year on a constant currency basis. Currency translation reduced reported sales growth by 4%.

Looking at sales growth in constant currency terms, our sales results were positively influenced by strong sales in Asia outside of Japan, where we saw a 14% growth in the quarter, sales in Europe were up 10%, Japan grew 7%, and in the U.S., we saw 4% growth. Sales to large pharmaceutical accounts remained weak while sales to smaller pharma, environmental, food safety, and industrial-based customers continued with positive momentum.

Looking at quarterly product-line revenues in constant currency terms, sales of LC products grew by 8% versus prior year, and Mass Spectrometry product systems were up 2%. Our Thermal Analysis business continued it's positive performance with revenue growth at 11%. Gross margins were down slightly from the fourth quarter of 2004 and came in at 59.7%. This quarter's product mix was more heavily weighted towards new products with higher manufacturing costs.

SG&A expenses were up only slightly in the quarter versus prior year, and increased at a rate lower than sales growth, as we began to see the full benefit of actions taken earlier this year to control costs in a more difficult environment than we originally anticipated.

R&D spending increased modestly for the quarter and the year. Growth was less than our historical rate given an unusually large base year in 2004, associated with product-related expenses for ACQUITY and Q-Tof development. In the fourth quarter, we lowered our full year effective tax rate to 17.7% as a result of shifts in profits in favor of our lower tax jurisdictions. Trueing this rate up within the quarter resulted in a 15.4% effective rate for Q4.

During the fourth quarter we purchased 5.6 million shares of our common stock for $216 million, against our authorized $500 million share repurchase program. Cash and short-term investments total $494 million, bringing us to a net debt position of about $333 million. With our strong balance sheet and liquidity, we believe we have adequate flexibility to fund our future needs.

Cash from operations, after funding $12 million of capital spending this quarter, was 47 million. Excluding a $7 million tax payment associated with the American Jobs Creation Act repatriation, cash from operations net of capital spending was $54 million. For the full year, cash from operations was $298 million, capital expenditures were $51 million, netting $247 million for the year, or 254 without the repatriation-related tax payment. Accounts receivable days sales outstanding stood at 70 days this quarter, down 6 versus Q4 last year. Foreign exchange benefited this calculation by 3 days.

Looking at full-year 2005 performance before unusual charges as detailed in our press release P&L this morning, sales grew by 5%, with no significant full-year currency impact. Gross margins declined slightly, primarily resulting from new-product introduction costs. Although SG&A grew 7% for the full year, the quarterly growth rate has declined consistently each quarter this year, as budget reductions were fully implemented and delivered. R&D grew by 3%, again largely due to the fact that 2004 had large project-related costs to new product introductions that did not repeat in 2005.

Our tax rate without the impact of the $24 million tax provision associated with the repatriation declined to 17.7% from 21%. And our fully diluted weighted average share count declined by 6%. Putting all of this together, earnings per fully diluted share before unusual charges increased 10% in 2005.

And now I'd like to turn to our outlook for 2006. First I'll talk about the year without FAS-123 expense, then I'll layer on the FAS-123 impact. We expect a continued tight spending environment within our large pharma accounts, as these customers continue to control costs and prioritize development projects. On the other hand, smaller pharma accounts, biotech, and other industrial end markets continue to look positive. We think that with continued acceptance of the ACQUITY product in all of our markets, we can grow sales next year by 7% before the impact of foreign currency translation. Currency at today's levels should reduce 2006 sales growth by 1%, resulting in reported sales growth of 6%.

Gross margin as a percent of sales is expected to decline by about 20 basis points from last year, as we ramp up ACQUITY production levels and bear the transition costs associated with the move of Alliance Production to Singapore. I do also want to make you aware of the fact that we are examining our SG&A spending, to align our resources with business opportunities around the world. This activity will likely result in an acceleration of investment in our Asian operations, and in product development expenditures.

Offsetting these investments we are planning reductions in expense growth elsewhere. There will likely be one-time costs associated with these actions that are not included in our current earnings projections. These activities will take place over the next few quarters, and could result in a one-time charge of 5 to $9 million later this year. Without any one-time charges but considering the net impact of the actions we plan to take on the SG&A expense, I would estimate that our overall SG&A is likely to grow around 5% in 2006.

R&D expenses are likely to grow at about the rate of sales. Assuming a continuation of the share relationships with cash flow generated in 2006, interest costs next year are expected to be approximately $22 million, as we plan to maintain our current net debt position. Our fully diluted weighted average share count is expected to be between 104 and 105 million shares. And we presently expect our effective tax rate to be around 18% for 2006.

Rolling all of this together, we expect earnings per fully diluted share of $2.22 for 2006, with the normal tolerance of $0.01 to $0.02 per quarter, and before unusual charges or FAS-123 expense. And now to layer on the impact of FAS-123, we expect FAS-123 to cost the Company between $0.21 and $0.24 per diluted share in 2006. Q1, we expect sales growth of 4%, which includes a negative currency impact of 3% this quarter. As you may recall, currency comparisons are more difficult early in 2006, neutral by midyear, and favorable later in the year.

At this sales level in the first quarter, we expect earnings per fully diluted share of $0.42, with the normal tolerance of $0.01 to $0.02 for the quarter, and before any unusual charges, and before FAS-123 expense. EPS on a GAAP basis including estimated FAS-123 costs are expected to be $0.37, with the normal tolerance of $0.01 to $0.02 in the quarter and before any unusual charges. Back to you, Doug.

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

Thank you. [OPERATOR INSTRUCTIONS]

One moment, please. Our first question comes from Tycho Peterson of JP Morgan.

Thanks for taking my call. Nice quarter. Doug, I wanted to pick up on a comment you made about seeing multiple UPLC orders outside of the core large pharma base, I was wondering if you could add a little more color on where those are coming from?

They're principally coming from pharma, just not predominantly in large pharma. Although, I should say we're beginning to see multiple orders in large pharma, too. But I think the noticeable ones that we saw in the fourth quarter were from what I recall, specialty pharma, generic, where the pace of ACQUITY has been picking up significantly. So it's pharmaceutical, but generally outside of the top 20 pharma houses.

Okay. And could you give a little color on nano-ACQUITY versus ACQUITY, and how that's doing?

Yes, it's doing fine. As you know, that's principally aimed as a front end to Q-Tof, and it's getting its most extensive play in proteomics applications. Since it's more a specialty system, it doesn't have near the kind of volume implications of the core ACQUITY unit, but it represents about, I think about it as 5 to 15% of the ACQUITY volume.

Okay. And then you mentioned some new product introductions, presuming these will come around in March, I think you said these are going to target the high end of the market?

Tycho, mostly the important introductions in Mass Spectrometry are focussed around ASMS, which is the middle of the year.

Okay.

You should think about that, and then the revenue implications, then of course are tilted into the second half of the year.

Okay. Fine. And finally, are you still expecting a competitive response on the high-end HPLC or UPLC front from Agilent?

We always expect the competition isn't going to go away out there. And so we fully expect that people are going to try both in a substantive way and in a marketing sense, to try to compete with our offerings. I think we've heard rumblings, we've seen some product announcements, but frankly, we haven't seen anything that even claims to produce the ACQUITY kind of performance. So I'd say at this point, I am even more encouraged by the kind of playing field that ACQUITY has.

Great, thank you very much.

Our next question comes from Quintin Lai of Robert Baird.

Hi, congratulations on the nice quarter and the year.

Thank you.

With respect to Asia, can you give us a little bit of color of the strength that you're seeing with respect to Life Science customers versus Industrial Food Testing customers?

Sure. I think in some areas it's clearly related to Life Science. And our strength in India is pharmaceutical, and largely focused on generic drug manufacturers. And they have been in strong investment mode, continued to be through 2005, and we anticipate that that will continue. If you look at some of the other areas, China tends to be a broader assortment of pharmaceutical applications, as well as Agricultural and Food Testing. Japan, which has been doing very well for us over a number of years is a broad-based, well-balanced sort of strength.

Pharmaceutical, Food Testing, Water Testing, Environment Analysis, kind of mirrors our overall business mix. You get to a place like Korea, I'd say this year the strength in Korea has been probably more Life Science focussed, but Korea also tends to be an area that has a good balance of industrial and pharmaceutical applications.

So with those opportunities, and you mentioned that you're going to accelerate spending in Asia, what's timeframe is that going to be, and are you going to look for a centralized strategy, or are you going to be looking at increasing in each of those countries that you just mentioned?

Well, our focus on Asia comes in both, kind of focusing on the customers and the applications, as well as a significant manufacturing presence and distribution presence in Asia. So we're investing along both fronts. And most of the investment on the marketing and customer focus side comes in just adding people to accommodate the increased demand in places like India, China, Korea, Japan. So we add application support, we add sales and service people. We have traditionally in Asia been a bit stronger in our LC applications areas, so you see us investing more in along the Mass Spec lines, and that's doing very nicely in Asia.

So it's nothing extraordinary, it's more of just building more and more critical mass in these very fast-growing areas of the world. But at the same time, over a multiple-year period, we haven't grown as fast in the more developed areas of the world, so we're finding, as John said, that we're having to reallocate resources. And that's where you'll see us do some things this year to kind of rebalance the load of that spending.

Thank you very much.

Our next question comes from Darryl Pardi of Merrill Lynch.

Hi, good morning.

Good morning, Darryl.

What was the sales growth within LC between instruments, consumable service?

John, do you have that?

Yes, the Chemistry and Service grew about 9 to 10%, and Instruments were about 5 to 6%.

Okay. And Doug, are you seeing -- what's the level of quote activity you're seeing with large pharma for multi-instrument implementation of ACQUITY?

It's high. It's high. I mean, there's no question that interest continues to build. And there's a lot of actually orders being placed. So I don't want to give you the impression that nothing's happening in large pharma. But there are some very large projects that we thought would kick off aggressively in 2005, the researchers thought that they would kick off, and now they're looking like 2006. So we're reluctant until we actually see the spending open up on a number of those things, to declare victory on it.

Has a person, your contact at pharma evolved at all, given the size of these orders that you're now getting pulled in to talk to a higher level purchasing manager on the orders, rather than directly with the researcher?

Purchasing, I'd say, if you look at the last five years, purchasing has certainly become more active in large pharma. But you know, it's risky to generalize too much, but I can say that in a couple large pharmaceutical companies, they have formed separate organizations to look at changing how they do things, either in discovery or development, or in QA/QC. So they're pulling in people from various disciplines, studying things like ACQUITY, things like other ways to do things that they're doing.

So you're finding these kind of special ad hoc committees being formed, some of whom have real procurement authority, others have advisory authority. And I think one of the things we've seen in '05, is that even pharma is trying to sort out who's going to have the responsibility for making some of these decisions. It's not along classical decision-making lines. And so we've seen that dynamic creep in a little bit more in the recent past.

Okay. And with respect to Q-Tof, you haven't really discussed Q-Tof in the call too much, can you give us a sense of what the quota activity and order levels are for Q-Tof?

Yes. Q-Tof has done very well, it was a great year in 2005 for our high end Mass Spec, and our high-end Triple Quad products. Where we really had softer performance was in the single Quadrupole and kind of lower capability triple Quad lines, that you'll see seeing some new product activity on this year. But the Q-Tof P, or Q-Tof Premier, are particularly aimed at proteomics and metabolite ID, has been well-received, and grew extraordinarily in 2005. I think we're seeing a pretty robust application environment there in that broadly described proteomics world.

The backlog for Q-Tof the end of the quarter, relative to the past few quarters?

We didn't drain the pipe, if that's what you're asking, Darryl.

Okay. Thank you very much.

Our next question comes from John Emerich of Iron Works Capital.

Thank you, your free cash flow per share exceeded your earnings per share in '05. What's the relationship look like in '06, assuming that within your sensitivity you come in around your earnings guidance for '06? Will you generate free cash flow per share of an equal amount?

Well, the numbers that John cited you, you'll see our share count go down next year, and you should see our free cash flow go up at least 10%.

Right.

So I think you can probably do the math there.

Yes, I can. Thank you very much.

You're welcome.

Our next question comes from Derik deBruin of UBS.

Hi, could you, John, could you walk me through the tax calculation for the fourth quarter, and did you take a reserve for the repatriation and then you got some credit for that, can you just walk me through the math?

The repatriation is completely separate, that's a $24 million charge that we had taken earlier that stands flat as we go through the fourth quarter. So that wasn't trued up. What you're looking at, is really the impact of lower profitability in the States, as we see lower growth rates in those businesses, and better performance internationally, as well as continued favorable from the Irish facility, where we now do a fair amount of Mass Spectrometry assembly as well. So all of those factors within the quarter is what led to the true-up in the annual rate, nothing to do with the AI-JCI.

Okay. And you were, did I hear you correctly, saying 18% is what you're looking for for 2006?

Yes, we think that we can maintain something around an 18% rate. It's tough to nail down specifically to a number with a tenth, but I'd say somewhere within the 18% range looks very likely, as we look at what we expect from the Irish facility, as well as expected sales results around the world at this point in the current budget roll-up.

Okay. And looking at your industrial performance in the quarter, any one particular industry stand out? Chemicals, for example, petrochemical, or was it across the board strength?

I'd say probably Food Safety continues to be one of the better applications. So it's interesting, as you look down the line, Beverage, Chemical Analysis in general, I'd say, has done very well. There there aren't a lot of laggards in that space right now. Everyone seems to be doing pretty well.

Okay. And I guess, when you look at your pharma customers, and realizing of course you've got two heritage ones that have announced cuts, are you hearing anything from the other major U.S. pharma, besides those two, about pending budget cuts, or anything like that? Is there any chatter out there?

I would say we don't see or hear anything extraordinary. A number of our good customers are talking about investing aggressively next year. Some of those, actually, had decent years this year. So it's a mixed bag. I think you know the ones that are still talking woefully about additional spending cuts and controls.

I'd say for the most part the top 15 to 20 accounts are talking more balanced, and more as if 2006 is going to be somewhat of a more return to normalcy. But do you have some very noteworthy companies that are still talking very woefully.

Could you give us some idea of what your percentage of sales are, to those ones that are particularly weak?

John, do we --

We do disclose that we don't have any customers that are larger than 3% of sales. So as you look at the large companies out there, the Pfizers and the Mercks, and the like, they're all less than that. When you look at their businesses, you could say only 50% of what we sell to them is recurring revenue-type items, Service and Chemistry, and the other half is Instruments. And when you look at the significant drop that we've had in 2005 from those customers, we're, in some instances, getting pretty close to that level of just sustainable recurring revenue. So I don't, overall, I don't look at any one particular customer causing us a dramatic impact as we look at 2006.

Great. Thank you very much.

Sure.

Our next question comes from Michael Stansky of Tudor Investments.

Do you have enough experience with the ACQUITY to comment on applications where you're getting traction, and also regarding column usage of the ACQUITY system?

And my second question is regarding the buyback, if I heard it right, 216 of the 500 was spent in Q4, and just regarding your thoughts on how you enact on the remaining program?

Sure. Speaking to your second point, Michael, it tended to be, the authorization from the Board is that we can buy back shares, essentially along management's discretion. What we've said to the marketplace, is that if a, assume that we'll do it evenly over the allotted time. We're not likely to do it more slowly than that. That's really been what we've done. The 216 we bought this quarter was faster than our pro rata, even though we're at the end of the year, we were out of the market because of market conditions, we weren't able to buy. So I think you'll see, as in the past, we'll tend to buy it faster than pro rata. That's our general bent at this moment.

If you a look at ACQUITY, and kind of the applications that are driving, first of all, it's amazing to me, but it's very broad-based. I mean, we're seeing customers in almost every application set, look at the benefits of ACQUITY, and some of them clearly are looking for the absolute best sensitivity they can get. Some of them, and you know, generic drug houses are looking for the absolute best throughput they can get. And some in proteomics are looking at the best resolution that they can get.

So it's really interesting that every aspect where we think we revolutionize the practice of chromatography, is being represented in the kind of demand that we're seeing. If you look at the multiple orders that we've gotten recently, I would say in the multiple orders, it's probably the productivity side that's been most cited, and the ability to take a 30-minute separation or a 40-minute separation, and bring it down reliable to a 5-minute-or-under separation. And it's very compelling to these customers in these productivity applications. So that, I think, is the most noteworthy that we've seen recently.

Thank you.

Our next question comes from John McCarthy of Infineon Capital.

Good morning.

Good morning. First question, I missed this share's repurchase during the quarter, I have the dollar amount, if I could just grab the actual number?

The shares that we bought back in the quarter, 5.6 million shares for $216 million.

Secondly, with regards to the 2006 revenue guidance, can you comment a little bit about how that breaks out HPLC, Mass Spec, Thermal Analysis?

Yes. For 2006, we would estimate that HPLC is likely to grow maybe 7 to 8%. We think that Mass Spec is probably going to be low to mid single digits, and TA probably 7-ish percent. So 7 in total, and then point of FX paying to that will get you 6.

Final question, with regard to the weakness in low-end triple quads and the single quads, do you think that's more internally, that you just haven't had the new products out there? Or is it price competition in the market as a lot of high-end suppliers really push into that space?

I don't think it's really price competition.

Okay.

Frankly, we've just -- nowhere in our business are we really seeing the effect of price to be very aggressive. The biggest dynamic is the weakness in large pharma. These systems were very popular, single quads particularly popular in drug discovery applications, and the low-end triple quads in early-stage development, late-stage discovery, [admin] applications in particular. So that's where we're clearly seeing a dramatic falloff this year. And it's also true that these products are at the end of their product stage. You're going to see new products that we're going to launch this year so, yes, I'd say that there is probably some compound dynamic there.

But I shouldn't look at it as weakness in the industrial markets for single quads or low-end triple quads?

No, that's not where we've seen most of our effect.

Okay. And final question, if you could just comment on what you're seeing in regard to the UPLC columns, I understand that when the instrument was launched, that was regarded as a key opportunity for Waters, in terms of capturing the column revenue. Have you seen anything even from smaller competitors trying to put out columns that would be compatible with the system, or are you currently capturing 100% share of that market?

Well, to say 100%, it's hard to know everything.

Well, above 90 or 80.

We're capturing all the UPLC analyses that are being done out there, I'd say, are substantively being done on ACQUITY columns.

Wonderful.

Interestingly enough, I think though our growth rate in ACQUITY columns is going to be phenomenal this coming year, it's been building and has been building very strongly. You should recognize that we've traditionally shipped three ACQUITY columns with every system that we sell. And that was always designed kind of as an introductory program. So as we move through the life cycle of this introduction, that will move into more revenue-producing rather than having three columns go with the system. That's one dynamic.

Secondarily, those systems that we have sold over the last 12 months have now worked their way through initial column usage that they got with the system, and are now replenishing their column supplies. We're beginning to see that kick in. We're also seeing these systems come on-stream at much higher use rates. So they're through kind of the qualification stage, and into the real high churn rate of running systems.

We've also, in the past year, substantially expanded the flavors and bonded phases of our column offerings. So when we first introduced the system, we really had one reverse-phase column, now we have a panoply of columns, that have really answered the market's needs for various types of separations.

That's a long-winded way of saying that growth rate in ACQUITY columns is very strong, it's almost exponential , and there's hope for lock-in of our system in consumables or revenue stream is really, I think, playing out, and there's no reason to think that won't stay largely as a monopoly, at least through 2006.

Okay. And should we look carefully at that when considering the gross margin, as it evolves over time with the growing installed base, presumably you can do very well on the columns, so --

Yes, absolutely.

Okay. Thank you so much.

You're welcome.

Our next question comes from John Sullivan of Leerink Swann.

Hi guys, congratulations.

Good morning, John.

I just wanted to ask you, can you help us understand a little better the cost-benefit analysis that the generic drug makers go through, when they're buying your ACQUITY system for use in their manufacturing processes? And then relatedly, are you seeing generic drug makers replacing HPLC on their existing lines with ACQUITY, or are you satisfying new demand in generics?

I'd say the first place, John, is new demand, but we're also seeing them replace existing HPLCs with UPLCs. What they're really seeing is, you can get as much throughput with fewer numbers of systems with ACQUITY, than you can with any traditional HPLC.

So if you've got X number of samples to run, pick a number, you got 30,000 samples a year to run, or 10,000 samples a week, with an ACQUITY UPLC, you can oftentimes run 4 times as many samples per unit time, than an HPLC can run. And as a result, it's compelling. You know, an ACQUITY UPLC may cost 20 or 25% more than the HPLC, but you can get an 80% productivity advantage. So it's just in those high-volume applications, the productivity is very compelling. And that's what we're seeing.

So have you seen situations where customers have bought an ACQUITY, instead of 3 or 4 of something else in the generic drug industry?

Yes. Yes we have, although we don't think that we've near tapped out to a situation, where the volume implications are terribly significant. We're probably seeing more activity right now on increased capacity, than on replaced capacity.

Thanks very much.

Our next question comes from Derik from UBS.

Hi, did you actually give the ACQUITY revenue number for the quarter?

I'm sorry, what was the question?

The ACQUITY revenue number for the quarter. You said it was up, but I didn't catch the dollar amount.

We didn't give it, and we're certainly --

Yes, I think we're not going to. It's just too sensitive a number. I think when we first launched this, a lot of people interested in, you know, was it real or was it Memorex. I think the important aspects are, that it more than doubled in the quarter, in terms of underlying growth rate and order rate. It did it at the same time our core HPLC product, our Alliance systems also grew very nicely, and so I think that's probably as much detail as we're willing to go into at this point.

Okay. While the productivity gains certainly are impressive, you're now getting people where they're going to buy 1 or 2 ACQUITYs, versus buying 4 or 5 Alliances. What does that do to the overall HPLC market growth rate? Particularly if the column life is a little bit longer on the ACQUITY systems, which it sounds like it might be?

Well, I think it's a fair question. I think what we're seeing in the current mode, is that we're taking share. Don't forget, we don't have 100% of the HPLC market. We have a market share somewhere in the 20s. So there's a very large installed base out there, that's still available for us to upgrade, and we clearly think that long-term, the world's going to move to UPLC. But we don't anticipate that that's going to be overnight.

There's still a very robust marketplace for traditional HPLC separations, certainly in the next couple of years. But what we're seeing with ACQUITY is, we're opening up new opportunities, as much as going back into our own installed base. So there's a huge opportunity out there.

Great. Thank you very much.

At this time, there are no further questions.

All right. Well, thank you all very much. We are encouraged by the strength that we saw in our business, and particularly the amount of productivity and profitability that it was able to drive. So we're encouraged, and we look forward to reporting to you on our first quarter results. Thanks very much.

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