Waters Corp (WAT) 2006 Q4 法說會逐字稿

Good morning, welcome to the Waters Corporation Fourth Quarter Financial Results Conference Call. [OPERATOR INSTRUCTIONS] All participants will be able to listen only until the question and answer session of the conference. This conference is being recorded. If anyone has any objections, please disconnect at this time. I would like to introduce your host for today's call, Mr. Douglas Berthiaume, Chairman, President, and Chief Executive Officer of Waters Corporation.

Sir, you may begin.

Thank you.

Good morning, and welcome to the Waters Corporation Fourth Quarter Financial Results Conference Call. With me on today's call is John Ornell, the Waters Chief Financial Officer, and Gene Cassis, the Vice President of Investor Relations.

This is our normal practice, I will provide an overview of the fourth quarter and the full-year results and then John will take you through the financial details and then lay out our first quarter and full-year 2007 outlook for you. 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 2007. 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, view our 10-K annual report for the fiscal year ended December 31, 2005 in 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 statements results, except during our regularly scheduled quarterly earnings release conference calls and web casts. The next earnings release call and web cast is currently planned for April 2007.

During this call we will be referring to 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 impact of restructuring and other one-time charges.

Thank you, John.

I would like to start by saying we're pleased and encouraged by our fourth quarter results. The quarter was stronger than we anticipated originally, due to a combination of favorable market dynamics that were accompanied by broad acceptance of our new systems offering.

Our sales growth before favorable currency impacts was 13%. I think that's an impressive result given the relative strength of our fourth quarter in 2005. I think even more important is the broad scope of the strength that we're seeing. We're seeing good double-digit or near double-digit growth in our HPLC and UPLC lines, our Mass Spectrometry products and our TA instruments business. The same strength is noticeable across market segments in the fourth quarter, with pharmaceutical, industrial, and the combined academic government markets all producing good, strong results.

Finally, although Asia continues to be our leading growth geography, the more developed areas of North America, western Europe, and Japan all delivered good solid results in the quarter. The strong close to 2006 allowed us to finish the year with annual sales growth of 11% and adjusted earnings per share growth of 22%.

Throughout 2006 some have had concerns about the overall health and capital spending behavior of the global pharmaceutical industry. As you may recall, spending by our largest accounts was a significant issue for us during 2005 and during the beginning of 2006. When we last spoke in October, I noticed some improvements on this front and mentioned that our larger accounts were beginning to release capital budgets and that we were cautiously optimistic that spending may be returning to a more reasonable level. Well, that positive trend we saw in the third quarter did continue in the fourth quarter and the release of capital at year's end allowed us to grow our large account sales over last year's level.

However, as we examine our overall pharmaceutical sales, including demand from generic houses, biotechs, and contract labs, that may look even more favorable. It appears to us that our larger pharmaceutical accounts are outsourcing more of their research and development and that we are as a result capturing more business from these smaller firms. In fact, our broadly defined pharmaceutical market segment delivered strong double-digit sales growth in the fourth quarter.

Sales to our industrial accounts continue to grow nicely in the fourth quarter, driven by strong demand from Asia and a superior performance by our TA instruments division. I'll talk a little bit more about TA in a few minutes.

Geographically, all major regions performed well and the strength that we saw in the fourth quarter was consistent with trends from earlier in the year, with Asia showing the strongest growth.

Health care related spending was strong globally, including our business, our businesses in Europe and in the U.S., while industrial spending showed particular strength in Japan, Latin America, and eastern Europe. Our systems base selling strategy benefited from the addition of new Mass Spectrometry platforms in the quarter. As you may recall, 2006 was a year of significant new product introductions for Waters. The strong momentum from growth associated with Acquity UPLC throughout the year was augmented by new mass spec capabilities. Because of the timing of new systems introductions, we anticipated stronger mass spec sales in the second half of 2006. I'm pleased to tell you that we have seen this ramp up in our second half Mass Spectrometry business and that our new system launches have been well-received.

Of particular note is the level of excitement associated with the launch of our Synapt HDMS instrument. Synapt offers researchers the unique capability to probe deeply into their samples to identify and quantify trace compounds using our proprietary technology that differentiates molecules by subtle differences in their 3-dimensional shape. In the fourth quarter, we delivered and installed several Synapt systems, and the initial customer response has been very positive. We're also very encouraged about the future prospects for Synapt and have confidence that the new scientific findings enabled by this exciting technology will result in increased demand for this system in 2007 and beyond.

Along with Synapt, we began shipment of a new Acquity LC/MS system in the fourth quarter that embodies our TQD Mass Spectrometer. The TQD is a tandem quadrupole device designed to offer high performance MS/MS results using an instrument designed with a chromatographer in mind. In growing applications, ranging from food and environmental testing to drug discovery, systems incorporating the new Waters TQD, along with systems using its sibling, the single quadrupole device that we introduced earlier in 2006, would uniquely allow us to bring Mass Spectrometry to the masses.

Our chromatography consumables and service businesses all in delivered another strong quarter with double-digit revenue growth. Acquity UPLC column sales continue to ramp as the install base of UPLC systems grows while our service revenues in Asia are progressing very nicely along with our expanding base of instruments in that region.

Now I'd like to say a few words about TA instruments division.

When we last spoke in October, I mentioned the -- our third quarter sales growth for TA, which were lower than expected, was likely a point off the line from the higher rates we saw in the first half of 2006. I noted that we introduced significant new products during the summer and that orders had outpaced sales in the third quarter. Well, everything came together nicely in the fourth quarter and the strength in this quarter more than offset the softness in the third quarter. Customer acceptance of TA's new product has been exceptionally strong across the board and with the successful integration of microcolorimetry products acquired earlier in 2006, we feel that the division is well-positioned to continue to grow and expand its market leadership position in 2007.

At this point, I'd like to take a few moments to review Waters' full-year 2006 performance to help set the stage of our business outlook and strategy for 2007.

As I mentioned earlier, we entered 2006 having weathered a difficult 2005 when we experienced slower and erratic growth from our pharmaceutical customers. On the bright side, Acquity UPLC was clearly gaining traction and our leadership position in liquid chromatography appeared secure. Our greatest concern as we started 2006 was the buying behavior of our large pharmaceutical customers. We thought that sales to this segment had reached a level that was close to bottoming, but we could not be really sure. As the year unfolded, it became increasingly confident -- I became increasingly confident in the viability of our early year outlook. Competitive responses, which tried to compete with Acquity UPLC hit the market in the first half of the year while at the same time we rolled out the first of the series of new Mass Spectrometry instruments, our single quadrupole device, the SQD. In the following months we introduced two additional MS platforms, and TA instruments rolled out new high-performance instruments too. By mid year, it also became apparent to us that Acquity was continuing to set performance standards in small particle chromatography and that competitive launches had corroborated the advantages of sub-2 micron particle chromatography without matching our level of system performance.

During the second half of the year, all our new product launches contributed to accelerated sales growth. While every year has some surprises, and fortunately in 2006, most of them worked in our favor. For Waters, these upsides had impacts for our top line performance, our profitability, and our capital structure.

Looking at revenue, we were pleased with the stronger than expected growth of the overall pharmaceutical business, including emerging clinical diagnostic applications and the continuation of the rapid expansion of our businesses in China, India, and eastern Europe. On the profitability side, our conservative posture with regard to SG&A spending during the first half of the year in combination with favorabilities on the top line contributed to higher operating margins. As our confidence in customer demand for the year improved, we began to add needed resources in the second half of the year to assure adequate customer support in fast-growing regions.

During the year, we also successfully transitioned the assembly of our Alliance HPLC to our manufacturing partner in Singapore. Though significant cost-savings were not realized in 2006. We gained significant confidence in this offshore production model and believe the major advantages of this new production strategy will be increasingly apparent over the next couple of years.

Looking at our capital structure, we continued to actively buy back shares of our stock and make selective acquisitions to augment our technological and marketing strength. John will review for you the progress we made on our share repurchase program, but first I'll say a few words about our acquisition.

We acquired three businesses in 2006, VICAM, Thermometric, and Environmental Resource Associates, or ERA. VICAM and ERA report into our Waters division operation and expand our product and market reach into food testing and environmental testing applications, respectively. Thermometric, on the other hand, is integrated within our TA instruments operation and broadens that division's technological portfolio to include microcolorimetry products. These are advanced instruments tailored to demanding life science application. These acquisitions are indicative of the type of opportunities that we will continue to seek moving forward, specifically fast-growing, profitable and likely smaller firms that strategically fit within our current operating structure. In 2006, revenues from these acquisitions added about a point of growth to our top line results.

I'd like now to make a few comments about our outlook and plans for 2007. In terms of year-over-year percentage earnings growth, 2006 is a tough act to follow. However, I feel more comfortable in assessing our prospects for 2007 than I did last year for a few reasons, including the more stable market conditions we experienced throughout 2006, our strong product lineup as we start off the year, and our confidence in the strategic programs we have planned for 2007.

Starting off with the stability of our market, I am more confident that the worst of the weak and erratic demand that we experienced from our large pharma customers is mostly behind us. Certainly some big pharmaceutical accounts are still struggling and restructuring. But overall for this group, we think the future is better than the recent past. In 2007, I expect that we will continue to see improving demand from these customers. Perhaps not a complete return to prior lofty spending levels, but rather improvements based upon penetration of our new products and the continued strength of our recurring revenue business with these customers. Also on the end market side, I expect that the strength that we had seen from our customers in developing geographical regions will continue in 2007.

In terms of programs for 2007, I'm pleased to tell you about strategic initiatives aimed at growing our long-term competitiveness, improving growth in new markets and improving our profitability. Our system platform strategy is key to our competitive position, and this year we will emphasize the importance of instrument control and data management in our new product offerings. This push has already begun with the decision to make our Acquity UPLC compatible with Mass Spectrometry technologies from an array of other manufacturers. This new capability allows us to offer Acquity performance to the large-installed base of Mass Spectrometry users and customers requiring Acquity separation with their Mass Spectrometry technology.

We plan to continue with advances on the software front by enabling our large installed base of Empower users -- Empower is our HPLC broad-based software platform -- with our new quadrupole Mass Spectrometry system including the SQD and the TQD. This will mean that the tens of thousands of current empower users will be able to add mass spec detection on their current system without having to move to a new software platform. We expect this new capability to be available in the second half of next year. Or 2007, I should say.

I also expect during 2007, for us to continue to broaden the appeal and application reach of our Acquity UPLC systems. New capabilities for Acquity are planned that involve advance detection modules and a wider range of column chemistries that raise the performance bar in terms of resolution, sensitivity, and speed.

Our TA instruments division is starting 2007 with strong momentum and a refreshed and industry-leading product line. In '07, I expect a strategic push into new markets for TA as they introduce our new microcolorimetry technology and simultaneously position the capabilities of our thermal analysis and rheometry systems for pharmaceutical and life science application.

In our applied markets, opportunities of interest for us include food safety, environmental testing and clinical diagnostics.

On the food safety and environmental side, we plan to look for opportunities to leverage our recent acquisitions and promote our new UPLC/MS and GC/MS systems to customers in these markets. We also see opportunities for heavier usage of our sample prep technology, much in the way our Oasis sample prep cartridges have successfully penetrated the clinical testing applications in drug development lab.

On the clinical diagnostics side, we have enjoyed significant growth for LC/MS systems for neonatal screening, immuno suppressant drug monitoring, and other therapeutic drug monitoring applications. The speed and improved usability of this LC/MS technology indicates to us that diagnostic applications for the technology will become increasingly important and present us with an attractive growth opportunity. To that end, we will continue to develop new systems to these applications and investigate internal and external investment opportunities to position Waters as a preferred supplier in this marketplace. So expect to hear more from us in this important strategic area.

Profitability enhancing programs in '07 will include higher manufacturing volumes of chromatography instrumentation systems in Singapore. The transfer of Alliance HPLC systems to Singapore proceeded very smoothly, and the product quality from that side has met all our expectations. Looking ahead, we will evaluate opportunities to further leverage production in Singapore.

On the capital structure side, we've been pleased with the significant share buy back plans that we've executed so far. The feedback that we've received from our large shareholders has been very positive, as they appreciate the long-term leverage to earnings created by our reduced share count. I expect that 2007 will be another strong year for cash flow at Waters and our plans are to deploy our cash, primarily to accretive and synergistic acquisitions and then towards future board-authorized share buy back.

Before passing it finally on to John, I'd like to say that throughout 2006 our system-based strategy has evolved in a manner that has reshaped our relationship with our customers and is continuing to differentiate us from our competition. For years, Waters has developed the reputation as a technological innovator in analytical chemistry, but in today's market, our customers demand more than new instrumentation and are looking more to us as a partner to help them accelerate their new product development, improve their productivity, and come comply with government regulations. I hear this continually as I meet with scientific and business executives from our key accounts. This new relationship with our customers has changed our approach to new product development in a way that results in more comprehensive systems offerings that integrate instrumentation, software, and advanced chemical products to deliver new levels of performance.

In recognition of these changes that have reshaped our company, you will begin to see changes in the way that we present ourselves to our customers and all our communications with a strong message that conveys that we are working for their success with unique solutions to their most important challenges.

I'd now like to turn it over to John for a review of the financials.

Thank you, Doug, and good morning.

We are pleased with the strong results our fourth quarter delivered with 16% growth in sales and 19% growth in non-GAAP earnings per diluted share -- $0.87 this quarter compared to earnings of $0.73 last year. On a GAAP basis, our earnings included a small restructuring charge related to the tail end of charges from our restructuring initiative begun earlier in the year, a writedown of our investment and cap realign and FAS123R stock option expenses. Including these expenses EPS were $0.78 for the quarter.

Looking at sales growth before currency effects, our sales grew 13% versus last year, currency this quarter contributed 3 points to overall sales growth. Examining corporate sales growth regionally and before foreign exchange effects our sales results were positive in our major geographies with strong sales growth in Asia, where we saw a 28% increase this quarter, sales within Europe were up 6% and in the U.S., sales grew by 9%. Sales to large pharmaceutical accounts continue to improve and global sales to smaller pharma and industrial based customers remain strong.

Turning to quarterly product line revenues, sales of LC products continue to be led by the exceptional growth of our Acquity UPLC technology, and grew by 12% versus prior year. Mass Spectrometry product shipments were up 14% as shipments of our new instruments ramped up throughout the quarter and our thermal analysis business had a very strong quarter with sales up 17% verses prior year.

And now I would like to comment on non-GAAP margins and expenses, which will exclude FAS123R expenses, restructuring charges and investment writedowns.

Gross margins for the quarter were up from Q3, but lower than Q4 last year. We generally enjoy a seasonal fourth quarter benefit of richer margins as higher production volumes leverage fixed manufacturing costs. However this year, our fourth quarter manufacturing volume was reduced as we lowered our inventory levels. Also this quarter, we experienced transition costs with our new MS products including higher initial production costs and new -- of the new products as well as the sale of older Mass Spectrometry demo inventory. For the full-year, margins came in as expected and we're down slightly from 2005.

SG&A expenses grew at a rate somewhat less than sales and were up 12% this quarter compared to prior year. For the full-year, SG&A grew only 5% as we delayed adding head count early in the year. During the second half of the year, we increased spending in support of our businesses in faster-growing regions of the world.

R&D spending grew by 9% for the quarter and 8% for the full year.

Our full-year effective tax rate is 15.5%, including FAS 123 effects.

This quarter's results contain an impairment charge relating to an investment we made in Caprion during the Proteomics investment surge in 2000. Recently Caprion entered into a pending agreement to merge with another Canadian company, the net result of which reduces our investment by about $5.8 million. Caprion is the last of a few equity investments that have been written down or sold over the last few years. The current residual value of all of these Proteomics investments on our balance sheet is around $4 million.

During the fourth quarter, we purchased 430,000 shares of our common stock for $21.4 million, against our authorized share repurchase program, leaving a remaining balance of $35 million to complete the program. For 2006, we have deployed $249 million in buy back programs and we purchased 5.8 million shares.

Cash and short-term investments totalled $514 million bringing us to a net debt position of around $390 million. This quarter, we renegotiated our credit lines with our bank group, extending the term of the agreement and providing slightly better borrowing rates. We believe we are well positioned to fund our future working capital needs and acquisition opportunities.

Cash from operations, after funding $13 million in capital spending this quarter, was $44 million. For the full-year 2006, cash from operations, net of capital spending came in at $212 million. This result is a bit difficult to compare to our history given a few factors. First, recent accounting changes have moved the tax benefits of stock options from operating cash flow to cash flow from financing activities. For the full-year 2006, this reduced cash from operations by $17 million. And earlier this year, our cash flow was adversely affected by nonrecurring items including a $4 million litigation payment and a $9 million AJCA American Jobs Creation Act tax payment. Adjusting for these items, cash flow this year was comparable to full-year 2005 levels.

Accounts receivable days sales outstanding stood at 64 days this quarter, down 6 days verses Q4 last year. Inventories declined by $13.2 million this quarter before adding ERA inventory, as we began volume shipments of our new Mass Spectrometry instrument and reduced safety stock of LC inventory. The acquisition of ERA added $4.3 million to inventory at year-end.

Looking at full-year 2006 performance before unusual charges and FAS 123 expenses as detailed in our press release P&L this morning, sales grew by 11% this year, with foreign exchange having a less than a 1% impact. Gross margins were down slightly as margin expansion was held back primarily due to product transfer costs and mass spec product introduction costs. SG&A grew by 5% for the whole year and was heavily back-end loaded as we delayed new spending earlier in the year. R&D grew by 8% and the results and as a result of all of this, our operating income expanded by 16%. And finally, our buy back programs increased interest costs, and decreased fully weighted, a fully diluted weighted average share count, which helped increase earnings per fully diluted share by 22% for 2006.

Now, I would like to turn to our outlook for 2007.

First a note about FAS 123R stock option expenses, now that these expenses are included in the 2006 base year-end comparison, we will now discuss our business results inclusive of FAS 123 expenses.

Our 2007 business prospects look positive with most of our -- with most of our end markets and geographies enjoying strong customer demand. Overall we see a range of 7% to 9% organic sales growth for 2007, and in addition to this base growth, acquisitions are expected to add a point of growth and currency is expected to add another point of growth. For financial modeling, we have chosen a 10% sales growth single point on the line estimate for 2007.

Gross margins for the full year are expected to improve by about 20 basis points with much of this improvement coming later in the year as the newly introduced mass spec products ramp up to full production volume and LC product volumes continue to expand.

Operating expenses should grow at about the same rate as sales in 2007. Spending growth rates versus prior year will likely be larger early in the year and lower in the second half. At the operating margin line, we expect to see an improvement in 2007 of between 50 and 75 basis points versus 2006.

We presently expect our effective tax rate to be in the neighborhood of 16% for 2007. Net interest expense is expected to be around $27 million for the year. And the net impact of our share repurchase program will likely reduce outstanding share count to around 101 million fully diluted average shares for 2007. Rolling all of this together, and, again, including FAS 123 expense, we currently expect earnings growth of 17% to $2.62 for fully diluted share with the normal tolerance of $0.01 to $0.02 per quarter.

For Q1, we estimate sales growth of 10%, comprised of 7% organic growth, 1 point of M&A and 2 points of currency impact. Currency comparisons are more favorable earlier in the year and have become neutral by year-end. Our organic growth guidance in the first quarter is a bit lower than our full-year expectation because the comparable 2006 base period saw 12% organic growth. At this sales level, we expect earnings per fully diluted share of $0.52 with a normal tolerance of $0.01 to $0.02 for the quarter.

And that's it. Back to you guys.

Okay. Thank you, John. Operator, I think we can now open it up for questions.

Thank you. [OPERATOR INSTRUCTIONS] Quintin Lai, you may ask your question.

Congratulations on a very nice quarter and year end.

Thank you.

Looking at the overall growth in -- especially in the fourth quarter or 2006, what impact did you see on pricing? Were you able to push some pricing for some of your leading edge products?

I would say overall we didn't see really much change in pricing throughout the year. Our practice is that we publish a new price list really at the front end of the year across all our geographies. And typically, we're increasing prices, a marginal amount, not a lot. Maybe a little more in our service and chemistries business rather than in our instruments. But I would say we didn't see significantly different price behavior in the fourth quarter than we saw at any other time of the year.

So then a lot of your growth is coming from volume. Looking at some of your consumables. It seems to me that your core HPLC volumes must also be growing, as well Acquity then.

Yes, that's true. I think you'll see that -- particularly in our consumables business, that continues to be very strong. Of course, Acquity is driving a lot of that because with Acquity you have proprietary consumables that are driving disproportionately high growth in that consumables market.

And the last question, I jump back into the queue. Congratulations on the nice launch of Synapt, is it too early to -- or could you make that stab at what do you think the overall market opportunity is for Synapt?

Well, I think we would characterize the marketplace, current marketplace for high-end Mass Spectrometry to be in the range of 225 million to 250 million, in that range annually. And I think Synapt competes in that. And obviously, in 2006 has a minuet share of that overall market. I think what happens is when you introduce a novel high-end technology what has historically happened is if the marketplace believes it, it takes it up pretty rapidly and many laboratories want to have one of those in their laboratories. We're hopeful that we have an instrument that's going to stimulate that kind of demand. But it's early on and I think time remains before we can forecast that kind of aggressive growth.

Thank you.

Tyco Peterson of of JP Morgan, you may ask your question.

Hi, thanks for taking the call. Following up on some of your comments about pharma spending, we obviously saw the new out of [Foser] this week. I guess for starters, can you quantify how big your CRO business is now and to the extent you're seeing any change currently since the beginning of the year in terms of demand? That would be helpful too.

We don't split out specifically with what we do with CROs and other elements of our business. And I don't care we're going to do that at this point. I can say that our CRO activity has been strong in '06. I can tell you that Pfizer individually represents less than 1% of our sales. So it's not a big piece. And I can tell you that don't look at Pfizer's announcements as saying that they're getting out of the separations or analytical instrument business. We had a pretty healthy quarter with Pfizer this past quarter. What's been going on at Pfizer has been going on for a long time. And clearly they're still in the process of restructuring, but they continue to look at strategic programs that we find very interesting and could lead to some significant investments.

It's awfully hard to pick a macro dynamic in one large account and relate that to spending in one of their development labs.

Fair enough. On the margins, there are a number of moving pieces between the ramp-up of the new mass speck products, the Singapore move and I guess some of the older products, can you give us a sense of what contributed to some of the margin softness? The relative contributions from each of those?

I'd say if you look at the gross margins, about a point or so versus perhaps what we may have expected in a normal Q4 ramp-up. Probably the inventory volume pieces, maybe near half of that where we shipped more out of inventory with the incremental sales than we pulled out of incremental production in the absorption associated with that. Had a significant amount of costs associated with ramping up volumes of Mass Spectrometry products, a piece of which probable continues into the first quarter. Maybe somewhere close to $0.5 million to a $ 1million of that kind of cost was in the quarter, as well as we had a significant inventory of demo products based on the demand that we had from mass spec products overall. We were able to push some of those demos out and the demos just have a lower gross margin. So that piece is most behind us and that might be another million or so of the issue.

And also, FX flow through on FX wasn't quite as good as we had more volumes of products that were produced in the UK and Ireland were a bigger part of the mix this time around versus history. All of those pieces kind of make up the point or so of deterioration verses prior year.

Great, that's very helpful, thank you very much. And congratulations.

Thank you.

[Inaudible] You may ask your question.

Hi, guys. I wanted to add my congratulations to a great quarter. My questions relate to the integration of your acquisitions and I'm wondering what do you plan to do or not to do integrations of acquisitions from interrupting your main business?

Sure. I think that's one of the advantages that we have with our particular acquisition practice. All of these acquisitions are eminently digestible. ERA's sales are under $20 million. It's been a very successful stand alone business. And we largely believe that it can continue to operate in that way. We're not looking for significant cost reductions to come out of that business. What we do think is that they have an approach to qualification of environmental lab that's been very successful in the United States, highly focussed on consumable products, so it's a very profitable approach, and we think we can leverage that outside the United States as well as leverage access to environmental labs that we have traditionally not focussed as heavily on as we have in the health care marketplace.

So it fits very nicely and particularly within the consumables management group here at Waters. We don't see any disruption coming from that business. The thermo metric with their microcolorimetry product line fit right in as a product line adjunct to the TA instruments business. We have done a few other product line integrations within TA over the last 5 years or so and they fit very nicely with manufacturing synergies and expanded market share growth and I think we're really looking for thermometric to really be a product line enhancement that we can now take throughout TA's worldwide organization. So, again, it doesn't really tax the organization very significantly. Vicam, again was about a $10 million business that's -- that has a unique technology using technology that wasn't present within Waters. Largely a stand alone business, but again something that Waters can leverage through its worldwide distribution organization, but didn't tax our manufacturing or other resources within Waters. So we look at these businesses that are not dilutive to our overall growth in top line or bottom line are likely to be significantly accretive after the first year of integration, and I think you'll see us try to do more of that sort of thing.

Do you plan to keep in those locations where they are or do you plan to move them sometime in the future?

We have no current plans to move them.

Okay. All right. Thanks.

Derik De Bruin of UBS, you may ask your question.

Hi, good morning.

Good morning.

So I guess just for the fourth quarter, what was the impact of the acquisition? The sales?

Yes, on the top line, it was probably just over a point, a strong point of growth. For ERA, it was almost nothing, that deal closed middle December. But the acquisitions earlier in the year, the thermo metric and Vicam would have been a strong point of topline growth.

Okay and I guess,what do you think your stock option expense levels for 2007 approximately the same run rate for 2006?

Yes, both the same, we have close to a $0.20 charge for 2006 and that's likely to come down maybe a penny or so as we look at that expense in 2007.

Okay. And, I guess, what do you see for CapEx and for operating cash flow for 2007?

Yes, I think we're looking at cash flow on a GAAP basis now that's going to be somewhere around 255 maybe a little higher than that, and that will include CapEx all in of about 50 million, so 305 gross before CapEx.

Okay. And I guess, when you look at the overall end markets, I guess, where are we in terms of the buildout of not so much the specially pharma or CROs, I guess just in terms of basic life sciences research in China and India?

Well, I think it's two different dynamics going on. I think certainly in India, which is heavily influenced by generic -- the generic drug market, their internal plans of what we see in the market is a very robust, very high-growth market. No indications of a slowing of demand in that area. And as you, of course, know, we have more drugs -- the flip side of drugs coming off patent is the robust opportunity for generic drug manufacturers. So I think you're likely to see a very strong investment in climate in India for another several years any way.

China is a more diverse marketplace for us. As a matter of fact, China is as strong for us in food and agriculture and environmental spending as it is for pharmaceutical applications. I will say that the pharmaceutical applications have been pretty robust for the last year. But we see no decline in that as we look out at least through 2007. Still a lot of infrastructure going on, still a lot of individual projects. But again, it's much more of a balance-- India is substantially aimed at generic drug manufacture. A much more balanced approach between a lot of different applications and we continue to see the kind of demand, even early in 2007 we continue to see good uptick in China.

Great. Thank you very much.

Stephen Unger with Bear Sterns, you may ask your question.

Hi, good morning.

Good morning, Steve.

First question, just now that the year's over, could you recalibrate our thinking and give us a rough mix of where sales are at geographically and in a product line basis and what the growth rates were for 2006?

Yes.

Yes. Okay. If you look at, if you look at it by geography for the full year, U.S., came in at about 4% for the year, Europe was up about 10, Asia was up about 34, Japan 7, and those are the major geographies. What was the other part of your question? You want to know by product?

Well, I would like to know what the mix is geographically and the mix by product and growth rates.

No, we're not -- that's a lot of detail. When we look at our business, we've talked about the fact that we do roughly 25% to 30% of our business in Europe -- 30 to 35 in the U.S., 20 or so in Asia, maybe 25-ish in scattered around the world, but we don't provide the specifics down to the -- down to the nitty-gritty.

No, that's good for me. And then by product, roughly mix? Just broadly?

Yes, you're still looking at TA being roughly 10% of the business. Mass spec growing close to its 20% piece, probably will surpass 20% as we go into next year. And HPLC being the 70%.

Perfect. And then what was the price of the EA acquisition? Has that been disclosed?

No we haven't disclosed that.

Okay. And you want us to wait for the K for that?

Yes.

Okay. And then in terms of the share repurchase authorization, Doug, you mentioned that there may be a future authorization. And how much is in your expectation in terms of cash you expect to deploy in share repurchases in 2007?

That's a good question, Steve. The -- the amount that we have left to spend on the current board authorization is how much, John?

35 or so.

35 million. So we're substantially ahead of our original plan on that half a billion dollar buy back. The board will evaluate the next authorization or whether they want any authorization early on this year at a board meeting coming up. I anticipate, although this is the forecast, so consider the warning language that the board will reauthorize a buy back that unless we saw a large acquisition that we were prepared to do, which we don't see on the horizon now, we think that we can accommodate the level of acquisitions that we, done this year and still have room to do an appropriate buy back authorization, probably in the range that we've done in the past. Which is a 2 to 3 year $500 million type of buy back. If I were forecasting, I would say that's likely like what you're going to see us marching to as we go through '07.

Okay. And then, John, in your forecast your guidance, you're not assuming the impact of assumed acquisitions. And then how much cash deployed in buy backs are you assuming?

Yes, I'd play on that front, Steve. Obviously ERA is, right at the start of the year. So that's really full point of M&A benefit comes from. There's nothing incremental to that. As it relates to a buy back, I am assuming we'll continue to march along that path. However, if we don't, the offsetting interest costs associated with not doing a buy back will end up being a push for the year anyway. So it's not a, it won't change my financial model dramatically.

Okay. Great. Congratulations on a great quarter, nice job guys.

Thank you.

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

Hey, guys, good morning. Could you, John, just talk about the tax rate for a second? What are the moving parts in the tax rate that could cause it to be lower than your 2007 guidance given where the fourth quarter just came in and given the continued sift toward Singapore and in manufacturing in 2007 versus 2006?

Well, we certainly enjoy a relatively low tax rate as we speak. On a 16% worldwide rate is it's certainly a very good rate. As we look at the various pieces of the, or the moving parts here as Singapore continues to ramp up, we will continue to enjoy a benefit in that geography. On the other hand, as the U.S., becomes more profitable and perhaps grows at a higher rate than what we saw last year, that will put upward pressure on the rate. So all in, I would be a little bit conservative right now and say that a 16% rate is probably a safe place to be at this stage and I wouldn't suggest that we could appreciably move that as we look at our plans for 2007.

John, is there any opportunity for UK Ireland manufactured revenues to move to be manufactured out of Singapore in 2007?

Yes, I mean, we're really happy with our Irish facility. There's no movement that's going to occur from that facility. As we look at Mass Spectrometry products, we have been working on and completed shifts of the lower technology, higher volume production into Ireland, already. That's working well. Whether there's incremental assemblies or things, perhaps that can bring to that party, we'll look at that, but there's no plans on a wholesale basis production to Singapore from either the UK or from Ireland.

Thanks very much. My last quick question to Doug. Doug, have you gotten any feedback from clients that they are considering using Synapt as a substitute for NMR capabilities specifically?

I'd say it's a little early on, John to forecast at this point. I'd say the general response is they are intrigued by the fact that gives them, this gives them more information about their. And the people who have been the thought leader, initial acquires of this technology have said this is new and novel and tells me something about it, a large molecule, typically. Where interestingly enough, we're seeing a lot of interest, early on interest from people in the small molecular wave too. I would see it as more synergistic than NMR rather than replacing NMR. But again, we're early on and I don't have a lot of data points.

Thanks for taking my questions.

Jon Groberg from Merrill Lynch, you may ask your question.

Hi, good morning, congratulations.

Good morning.

Morning.

Just I just had one question on your strategic initiative. You mentioned specifically how we might expect to hear more and you probably weren't anticipating explaining more in 20 minutes, but on the diagnostic front where you mentioned the different applications for LC/MS and how you expect those to continue to grow. And specifically around whether or not in that strategic initiative you're planning on looking for some type of FDA approval for the LC/MS for specific applications or if your strategy is simply to supply that to others who then they get that approval?

It's an interesting area for us. And probably deserves a more comprehensive forum. Are necessary and appropriate, and we are -- we are progressing with that. In some areas, like in we're largely using, we're accessing that market through a partner and providing the Mass Spectrometer in that particular application. We're, I would say behind all of our here is the belief that we have to get more capable in this whole area of clinical diagnostics. And we're investing here at a higher rate than we are in many of our other applications. We think it's going to grow faster in tests and applications that currently are not typically mass spec tests. I'd say we see more interests on the part of miscellaneous biotech companies or academics or start-ups with people who have an approach to using Mass Spectrometry in the diagnostic or clinical vein.

Like every month we're seeing more people seek us out for applications that they're working on that might displace an existing mechanism or something that brings or serves an unmet medical diagnostic need today. It's very exciting. And we are looking at ways to get further integrated in this area with -- with added capabilities in the chemistry side and than the information side. It was, one of our faster-growing applications in this past year and I expected it will be in '07 also.

The question revolves around, I think a lot of companies like yourselves are looking at these potential applications. And I think some maybe underestimate the expenses and the costliness of having to get the different approval. Is that in your kind of outlook for the year in the margins and everything that you described?

Yes. I'd say the costs that we anticipate having to spend in '07 are in our operating plan. You don't -- we are actively evaluating some ways to increase our penetration into this market. And we haven't driven those into our forecast. But I wouldn't -- I currently wouldn't tell you that that's likely to dilute our earnings.

Okay. And just out of curiosity. Just on the side, given so much is in LC/MS, how do you go about, do you just allocate a certain price to the LCM, I'm just curious how you go about deciphering all of this given --

You have an excellent question and it's one of the reasons we we've tried to keep sending this message that we're going to stop doing this because a lot of it's arbitrary. Our data platforms are now becoming integrated so calling one an HPLC platform versus an MS platform is totally arbitrary going forward. And you're absolutely right. When you buy a system with a single or a triple on the back end and an Acquity on the front end, you're buying a system. And if you're a customer, what you're willing to pay for the front end versus the back end is a pretty silly question. You're not buying an engine and a trunk. However we're kind of trapped a little bit in this transition between what we were and what we were going to be. And I think as I finished up my talk and we're really redefining what we are, we're going to talk a lot more about applications and about the customer demand side of this and move away from this was a mass spec revenue and this was an LC revenue. You're absolutely right, it's getting more and more arbitrary. And it could be misleading.

Okay. Great. Thanks, congrats again.

Oliver Marty of Columbus Circle Investors, you may ask your question.

Great. Thank you. I just -- hope this question wasn't asked, but if not, what was the impact of bottom line from currency and two was there any unusual items in the gross margin. Thanks.

We did talk a little bit about gross margin earlier and we had indicated in the quarter it was down a point or so from prior year, up from the third quarter, but the traditional leverage in the quarter was offset by an inventory reduction. And we had also indicated that we sold a fair number of Mass Spectrometry demo units and we had that impacted the quarter. And a piece of an FX issue within gross margin is the fact that the flow through wasn't quite as great that quarter given the higher volume of UK and Ireland sourced products. For the full quarter, it wasn't quite a penny of benefit by the time you roll it all the way to the bottom line.

Okay. And that includes the FX benefit included in the gross margin, right?

Right.

Okay, thank you.

Sure.

The last question is from Peter McDonald of American Technology research.

Good morning, first a quick question on the tax rate going forward. Is 16% roughly a sustainable level or is there anything that disappears over time?

To the next few years, 16% feels like it is a sustainable tax rate. We have had over the last couple of years a depressed state of growth, perhaps in the U.S., which is provided a, some downward benefit over the 2005-time frame, we're wrapping up a benefit in Singapore that will continue for the next several years. I think the two pretty much offset Ireland production continues to ramp-up, so I think 16% is a pretty good estimate for the next few years.

Okay. Great. And maybe, could you give us a little bit of sense of where the most interest in Synapt's been, kind of the early adapters?

Sure, I'd say the, the major piece of the interest has been in the large molecular wave world. So discovery type of applications. That was and the earliest papers were kind of aimed at the interesting kind of new information that it would provide there. And so there you're typically working with intact protein. What we've seen recently is a growing level of interest in the small molecular waste world, which, you know is obviously better because that opens up the universe even larger. So I think early signs are that people may be viewing this as a much broader workhorse high-end instrument.

Okay. Great. Thanks and good quarter.

Thank you.

Thank you. At this time, you have no further questions, sir.

Well, thank you, operator. And thank you all for being with us this morning. We look forward to talking to you again as the first quarter results are published.

You may disconnect at this time. Your call has concluded.